**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 20-F**

 

o  REGISTRATIONSTATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIESEXCHANGE ACT OF 1934

 

OR

 

ý  ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIESEXCHANGE ACT OF 1934

 

**For the fiscal year ended December 31, 2005**

 

OR

 

o  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                     to                     

 

OR

 

o  SHELLCOMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report ________________________

 

Commission file number:  1-13240

 

**EMPRESA****NACIONAL****DEELECTRICIDAD S.A.**

(Exact name of Registrant asspecified in its charter)

 
| **NATIONAL ELECTRICITY**                              |       |                                             |
|-------------------------------------------------------|------------|--------------------------------------------------|
| **COMPANY OF CHILE, INC.**                            | ** ** | **CHILE**                                        |
| (Translation of Registrant’s  name into English) |       | (Jurisdiction of  incorporation or organization) |
|                                                  |       |                                             |
| **Santa Rosa 76, Santiago, Chile**                    |
| **Telephone No. (562) 630-9000**                 |
| (Address of principal  executive offices)             |

 

**Securitiesregistered or to be registered pursuant to Section 12(b) of the Act:**

 
| **Title of each class**    | ** ** | **Name of each exchange on which registered** |
|----------------------------|------------|-----------------------------------------------|
| American Depositary Shares |       | New York Stock Exchange                       |
| Shares                     |       | New York Stock Exchange*                      |

 

----

*Listed, not for trading, but only in connection withthe registration of American Depositary Shares, pursuant to the requirements ofthe Securities and Exchange Commission.

 

**Securitiesregistered or to be registered pursuant to Section 12(g) of the Act:****[None]**

**Securitiesfor which there is a reporting obligation pursuant to Section 15(d) ofthe Act:**

 

| U.S.$ | 150,000,000 |   | 7.200% |   | Notes due 2006 |
|-------|-------------|--------|--------|--------|----------------|
| U.S.$ | 230,000,000 |   | 7.875% |   | Notes due 2027 |
| U.S.$ | 220,000,000 |   | 7.325% |   | Notes due 2037 |
| U.S.$ | 200,000,000 |   | 8.125% |   | Notes due 2097 |
| U.S.$ | 400,000,000 |   | 7.750% |   | Notes due 2008 |
| U.S.$ | 400,000,000 |   | 8.500% |   | Notes due 2009 |
| U.S.$ | 400,000,000 |   | 8.350% |   | Notes due 2013 |
| U.S.$ | 200,000,000 |   | 8.625% |   | Notes due 2015 |

 

Indicatethe number of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report.  Shares of Common Stock: 8,201,754,580

 

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.

ý  Yes      o  No

 

If this report is an annualor transition report, indicate by check mark if the registrant is not requiredto file reports pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934.

o  Yes      ý  No

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days:

ý  Yes      o  No

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.

 

ý Large accelerated filer                o   Acceleratedfiler                o  Non-acceleratedfiler

 

Indicate by check mark whichfinancial statement item the registrant has elected to follow:

o  Item17      ý  Item18

 

If this is an annual report,indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of theExchange Act).

o  Yes      ý  No

 

 

----

 

**TABLE OF CONTENTS**

 
| ** **                        | ** **                                                                    |
|-----------------------------------|-------------------------------------------------------------------------------|
| INTRODUCTION                      |                                                                          |
| Financial  Information            |                                                                          |
| Technical  Terms                  |                                                                          |
| Calculation  of Economic Interest |                                                                          |
| Forward-Looking  Statements       |                                                                          |
| PART I                       |                                                                          |   |
| Item  1.                          | Identity  of Directors, Senior Management and Advisors                        |   |
| Item  2.                          | Offer  Statistics and Expected Timetable                                      |   |
| Item  3.                          | Key  Information                                                              |   |
| Item  4.                          | Information  on the Company                                                   |   |
| Item 4A.                          | Unresolved Staff Comments                                                     |   |
| Item 5.                           | Operating and Financial Review and  Prospects                                 |   |
| Item 6.                           | Directors, Senior Management and  Employees                                   |   |
| Item 7.                           | Major Shareholders and Related Party  Transactions                            |   |
| Item 8.                           | Financial Information                                                         |   |
| Item 9.                           | The Offer and Listing                                                         |   |
| Item 10.                          | Additional Information                                                        |   |
| Item 11.                          | Quantitative and Qualitative  Disclosures About Market Risk                   |   |
| Item 12.                          | Description of Securities other than  Equity Securities                       |   |
| PART II                      |                                                                          |   |
| Item 13.                          | Defaults, Dividend Arrearages and  Delinquencies                              |   |
| Item 14.                          | Material Modifications to the Rights  of Security Holders and Use of Proceeds |   |
| Item 15.                          | Controls and Procedures                                                       |   |
| Item  16.                         | [Reserved]                                                                    |   |
| Item 16A.                         | Audit Committee Financial Expert                                              |   |
| Item  16B.                        | Code  of Ethics                                                               |   |
| Item 16C.                         | Principal Accountant Fees and  Services                                       |   |
| Item 16D.                         | Exemptions from Listing Requirements  for Audit Committees                    |   |
| Item 16E.                         | Purchases of Equity Securities by  the Issuer and Affiliated Persons          |   |
| PART III                     |                                                                          |   |
| Item 17.                          | Financial Statements                                                          |   |
| Item 18.                          | Financial Statements                                                          |   |
| Item  19.                         | Exhibits                                                                      |   |

 

----

 

**INTRODUCTION**

 

*As used in this annual report on Form 20-F,first person personal pronouns such as “we,” “us” or “our” refer to EmpresaNacional de Electricidad S.A. (“Endesa Chile”) and its consolidatedsubsidiaries unless the context indicates otherwise.  Unless otherwise indicated, our interest inour principal subsidiaries and related companies is expressed in terms of oureconomic interest as of December 31, 2005.*

 

**FinancialInformation**

 

In this annual report on Form 20-F, unlessotherwise specified, references to “dollars,” “$,” “U.S. dollars” or “U.S.$”are to United States dollars, references to “pesos” or “Ch$” are to Chileanpesos, the legal currency of Chile, references to “Ar$” or “Argentine pesos”are to the legal currency of Argentina, references to “R$,” “reals” or “reais”are to Brazilian reals, the legal currency of Brazil, references to “soles” areto Peruvian soles, the legal currency of Peru, references to “CPs” or Colombianpesos are to the legal currency of Colombia and references to “UF” are toUnidades de Fomento.  The Unidad deFomento is a Chilean inflation-indexed, peso-denominated monetary unit.  The UF rate is set daily in advancebased on changes in the previous month’s inflation rate.  As of December 31, 2005, 1 UF wasequivalent to Ch$ 17,974.81.  TheU.S. dollar equivalent of 1 UF was U.S.$ 35.07 at December 31,2005, using the Observed Exchange Rate reported by the Banco Central de Chile(the “Chilean Central Bank” or the “Central Bank”) as of December 31, 2005of Ch$ 512.50 per U.S.$ 1.00. As of February 28, 2006, 1 UF was equivalent toCh$ 17,922.63.  The U.S. dollarequivalent of 1 UF was U.S.$ 34.64 as of February 28, 2006,using the Observed Exchange Rate reported by the Central Bank ofCh$ 517.33 per U.S.$ 1.00.

 

The audited consolidated financial statements of*Empresa Nacional de Electricidad S.A.*, or Endesa Chile(the “Company”), and, unless otherwise indicated, other financial informationconcerning us and our subsidiaries included in this annual report are presentedin constant Chilean pesos in conformity with *Chilean*generally accepted accounting principles (“Chilean GAAP”) and the rules ofthe *Superintendencia de Valores y Seguros,*(Superintendencyof Securities and Insurance), or SVS. Data expressed in Chilean pesos for all periods in the Company’s auditedconsolidated financial statements for the three fiscal years ended December 31,2005 are expressed in constant Chilean pesos as of December 31, 2005.  See Note 2(c) to our auditedconsolidated financial statements included herein.  For Chilean accounting purposes, inflationadjustments are calculated based on a “one-month lag” convention using aninflation adjustment factor based on the Indice de Precios al Consumidor(Chilean consumer price index or “Chilean CPI”).  The Chilean CPI is published by Chile’s *Instituto Nacional de Estadísticas* (the “National Bureau ofStatistics”).  For example, the inflationadjustment applicable for the 2005 calendar year is the percentage changebetween the November 2004 Chilean CPI and the November 2005 ChileanCPI, which was 3.6%.  Chilean GAAP asapplied to the Company differs in certain important respects from accountingprinciples generally accepted in the United States (“U.S. GAAP”).  See Note 32 to our audited consolidatedfinancial statements contained elsewhere in this annual report for adescription of the principal differences between Chilean GAAP and U.S. GAAP, asthey relate to us, and for a reconciliation to U.S. GAAP stockholders’ equityand net income as of and for the three years in the period ended December 31,2005.

 

Under Chilean GAAP, we consolidate the results fromoperations of a company defined as a “subsidiary” under Law No. 18,046(the “Chilean Companies Act”).  In orderto consolidate a company, we must generally satisfy one of two criteria:

 

•                  control, directly or indirectly,more than a 50% voting interest in such company; or

 

•                  nominate or have the powerto nominate a majority of the board of directors of such company if we control50% or less of the voting interest of that company.

 

Endesa Chile consolidates all its operational Chileansubsidiaries.  In Argentina, Endesa Chileconsolidates the hydroelectric company *Central**Hidroeléctrica El Chocón S.A.*, (“El Chocón”),and thermoelectric company *Endesa Costanera S.A.*,(“Costanera”).  In Colombia, Endesa Chileconsolidates generation companies *Central**Hidroeléctrica de Betania S.A. (“E.S.P.”,*or**“Betania”), and *Emgesa S.A. E.S.P.*,(“Emgesa”).  Endesa Chile alsoconsolidates the generation company *Edegel S.A.*(“Edegel”), in Peru.

 

----

 

For the convenience of the reader, this annual reportcontains translations of certain Chilean peso amounts into U.S. dollars atspecified rates.  Unless otherwiseindicated, the U.S. dollar equivalent for information in Chilean pesos is basedon the Observed Exchange Rate, as defined in “Item 3.  Key Information—A. Selected FinancialData—Exchange Rates” at December 31, 2005. The Federal Reserve Bank of New York does not report a noon buying ratefor Chilean pesos.  No representation ismade that the Chilean peso or U.S. dollar amounts shown in this annual reportcould have been or could be converted into U.S. dollars or Chilean pesos, asthe case may be, at such rate or at any other rate.  See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates.”

 

**Technical Terms**

 

As used throughout, references to “GW” and “GWh” areto gigawatts and gigawatt hours, respectively; references to “MW” and “MWh” areto megawatts and megawatt hours, respectively; references to “kW” and “kWh” areto kilowatts and kilowatt hours, respectively; and references to “kV” are tokilovolts.  Unless otherwise indicated,statistics provided in this annual report with respect to electricitygeneration facilities are expressed in MW, in the case of the installedcapacity of such facilities, and in GWh, in the case of the aggregate annualelectricity production of such facilities. One GW = 1,000 MW, and one MW = 1,000 kW.  Statistics relating to aggregate annualelectricity production are expressed in GWh and are based on a year of 8,760hours.  Statistics relating to installedcapacity and production of the electricity industry do not include electricityof self-generators.  Statistics relatingto our production do not include electricity consumed by us within ourgenerators.

 

Technical transmission energy losses are calculatedby:

 

•                  subtracting the number ofGWh of energy sold from the number of GWh of energy purchased and generated(which already excludes own energy consumption and losses of the power plant),within a given period.

 

**Calculationof Economic Interest**

 

References are made in this annual report to the “economicinterest” of Endesa Chile in its subsidiaries or related companies.  In circumstances where Endesa Chile does notown its interest in a subsidiary or related company directly, the economic interestof Endesa Chile in such ultimate subsidiary or related company is calculated bymultiplying the percentage ownership interest of Endesa Chile in a directlyheld subsidiary or related company by the percentage ownership interest of anyentity in the chain of ownership of such ultimate subsidiary or relatedcompany.  For example, if Endesa Chileowns 60% of a directly held subsidiary and that subsidiary owns 40% of arelated company, Endesa Chile’s economic ownership interest in such relatedcompany would be 24%.  References arealso made in this annual report to the economic interest of Endesa Chile in itssubsidiaries and related companies.

 

ENERSIS S.A. (“Enersis”), a holding company whosesubsidiaries are engaged in the generation, transmission and distribution ofelectricity in Chile, Argentina, Brazil, Colombia and Peru, beneficially ownedas of the date of this annual report, directly or indirectly, 60.0% of EndesaChile’s outstanding capital stock.

 

**Forward-LookingStatements**

 

This annual report contains statements that are or mayconstitute forward-looking statements. These statements appear throughout this annual report and includestatements regarding our intent, belief or current expectations, including butnot limited to any statements concerning:

 

•                  our capital investmentprogram;

 

•                  trends affecting ourfinancial condition or results from operations;

 

•                  our dividend policy;

 

•                  the future impact ofcompetition and regulation;

 

2

----

 

•                  political and economicconditions in the countries in which we or our related companies operate or mayoperate in the future;

 

•                  any statements preceded by,followed by or that include the words “believes,” “expects,” “predicts,” “anticipates,”“intends,” “estimates,” “should,” “may” or similar expressions; and

 

•                  other statements containedor incorporated by reference in this annual report regarding matters that arenot historical facts.

 

Because such statements are subject to risks anduncertainties, actual results may differ materially from those expressed orimplied by such forward-looking statements. Factors that could cause actual results to differ materially include,but are not limited to:

 

•                  changes in the regulatoryenvironment in one or more of the countries in which we operate;

 

•                  changes in the environmentalregulatory framework in one or more of the countries in which we operate;

 

•                  our ability to implementproposed capital expenditures, including our ability to arrange financing whererequired;

 

•                  the nature and extent offuture competition in our principal markets;

 

•                  political, economic anddemographic developments in the emerging market countries of South Americawhere we conduct our business; and

 

•                  the factors discussed belowunder “Risk Factors.”

 

You should not place undue reliance on suchstatements, which speak only as of the date that they were made.  Our independent public accountants have notexamined or compiled the forward-looking statements, and, accordingly, do notprovide any assurance with respect to such statements.  You should consider these cautionarystatements together with any written or oral forward-looking statements that wemay issue in the future.  We do notundertake any obligation to release publicly any revisions to forward-lookingstatements contained in this annual report to reflect later events orcircumstances or to reflect the occurrence of unanticipated events.

 

For all these forward-looking statements, we claim theprotection of the safe harbor for forward-looking statements contained in thePrivate Securities Litigation Reform Act of 1995.

 

3

----

 

**PART I**

 

**Item 1.**           Identityof Directors, Senior Management and Advisors

 

Not applicable.

 

**Item 2.**           OfferStatistics and Expected Timetable

 

Not applicable.

 

**Item3.**           Key Information

 

**A.**            Selectedfinancial data.

 

The following summary of consolidated selectedfinancial and operating data should be read in conjunction with, and isqualified in its entirety by reference to, the Company’s audited consolidatedfinancial statements, included in this annual report.  The audited consolidated financial statementsare prepared in accordance with Chilean GAAP and the rules of theSuperintendency of Securities and Insurance (“SVS”), which together differ incertain important respects from U.S. GAAP. Note 32 to the audited consolidated financial statements provides adescription of the principal differences between Chilean GAAP and U.S. GAAP anda reconciliation to U.S. GAAP of net income and total shareholders’ equity forthe periods and as of the dates therein indicated.  Financial data as of or for each of the fiveyears ended December 31, 2005 in the following table have been restated inconstant Chilean pesos as of December 31, 2005.

 

All data, except ratios and operating data, are inmillions.  For the convenience of thereader, all data presented in U.S. dollars in the following summary, as of andfor the year ended December 31, 2005 are translated at the ObservedExchange Rate for December 31, 2005 of Ch$ 512.50 perU.S.$ 1.00.  The Federal ReserveBank of New York does not report a noon buying rate for Chilean pesos.  No representation is made that the Chileanpeso or U.S. dollar amounts shown in this annual report could have been orcould be converted into U.S. dollars or Chilean pesos, at such rate or at anyother rate.  For more informationconcerning historical exchange rates, see “Item 3. Key Information—A. SelectedFinancial Data—Exchange Rates” below.

 

Our principal operating subsidiaries were consolidatedprior to 1998. As of October 1, 2005, the total participation interestEndesa Chile held in Centrais Electrica Cachoeira Dourada S.A. (“CDSA”,92.51%), was contributed to Endesa Brasil and consequently ceased to beconsolidated by Endesa Chile, significantly affecting balance sheets figuresfor December 31, 2005.  Moreimportant effects may appear in future income statements since revenues andrelated costs will no longer be consolidated. See “Item 4.A — History and Development of the Company”, for details onEndesa Brasil.  All companies havebeen consolidated according to Chilean GAAP.

 

The information detailed in the following tableincludes the effect of certain accounting changes for the five years ended andas of December 31, 2005, which affect the comparability presentedbelow.  For further information onchanges in accounting policies see Notes 3 and 32 to our consolidated financialstatements.

 
| ** **                                                     | ** ** | **As of or for the year ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                     | ** ** | **2001**                                          | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                                     | ** ** | **MCh$**                                          | ** ** | **MCh$** | ** ** | **MCh$** | ** ** | **MCh$** | ** ** | **MCh$** | ** ** | **(millions of U.S.$) (1)** | ** ** |
| ** **                                                     | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **MU.S.$** | ** ** |
| **Chilean  GAAP:**                                             | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues  from operations                                      |       | 1,121,083                                         |       | 1,006,129 |   | 977,246 |   | 1,069,838 |   | 1,123,039 |   | 2,191.3 |   |
| Cost of  operations                                            |       | (710,660                                          | )          | (595,877 | ) | (584,519 | ) | (651,842 | ) | (689,599 | ) | (1,345.6 | ) |
| Administrative  and selling expenses                           |       | (37,212                                           | )          | (38,920 | ) | (33,263 | ) | (35,685 | ) | (38,578 | ) | (75.3 | ) |
| Operating  income                                              |       | 373,211                                           |       | 371,332 |   | 359,464 |   | 382,311 |   | 394,862 |   | 770.5 |   |
| Equity in  income (losses) of related companies, net           |       | (10,668                                           | )          | 9,191 |   | 18,445 |   | 19,894 |   | 13,569 |   | 26.5 |   |
| Goodwill  amortization                                         |       | (8,869                                            | )          | (116,435 | ) | (1,639 | ) | (1,517 | ) | (1,366 | ) | (2.7 | ) |
| Interest  (expense) income, net                                |       | (232,448                                          | )          | (217,614 | ) | 200,565 |   | (184,041 | ) | (163,242 | ) | (318.5 | ) |
| Price-level  restatement and foreign currency translation, net |       | (10,905                                           | )          | 3,814 |   | 10,121 |   | 23,664 |   | 16,219 |   | 31.6 |   |

 

4

----

 
| ** **                                                                        | ** ** | **As of or for the year ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2001**                                          | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                                                        | ** ** | **MCh$**                                          | ** ** | **MCh$** | ** ** | **MCh$** | ** ** | **MCh$** | ** ** | **MCh$** | ** ** | **(millions of U.S.$) (1)** | ** ** |
| ** **                                                                        | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **MU.S.$** | ** ** |
| Other  non-operating income (expense), net                                        |       | 2,880                                             |       | 15,112 |   | (16,448 | ) | 29,054 |   | (20,306 | ) | (39.6 | ) |
| Income  before income taxes, minority interest and negative goodwill amortization |       | 107,441                                           |       | 35,176 |   | 169,378 |   | 211,257 |   | 239,736 |   | 467.8 |   |
| Income taxes                                                                      |       | (42,806                                           | )          | (75,750 | ) | (29,072 | ) | (96,790 | ) | (91,954 | ) | (179.4 | ) |
| Extraordinary  loss                                                               |       | —                                            |       | (11,722 | ) | — |   | — |   | — |   | — |   |
| Minority  interest                                                                |       | (36,483                                           | )          | (49,849 | ) | (73,894 | ) | (44,343 | ) | (52,469 | ) | (102.4 | ) |
| Amortization  of negative goodwill                                                |       | 49,240                                            |       | 92,149 |   | 16,555 |   | 16,681 |   | 15,310 |   | 29.9 |   |
| Net income  (loss)                                                                |       | 77,392                                            |       | (9,995 | ) | 82,967 |   | 86,805 |   | 110,623 |   | 215.8 |   |
| Net income  (loss) per share in Ch$/U.S.$                                         |       | 9.44                                              |       | (1.22 | ) | 10.12 |   | 10.58 |   | 13.49 |   | — |   |
| Net income  (loss) per ADS in Ch$/U.S.$ (2)                                  |       | 283.08                                            |       | (36.56 | ) | 303.60 |   | 317.40 |   | 404.70 |   | 0.8 |   |
|                                                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| **US GAAP  (6):**                                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues  from operations                                                         |       | 1,127,016                                         |       | 984,866 |   | 977,247 |   | 1,069,838 |   | 1,123,039 |   | 2.191.3 |   |
| Operating  income                                                                 |       | 388,698                                           |       | 203,423 |   | 166,154 |   | 388,246 |   | 426,004 |   | 831.2 |   |
| Equity in  income of related companies                                            |       | (17,134                                           | )          | 31,566 |   | 47,991 |   | 19,895 |   | (14,996 | ) | (29.3 | ) |
| Income taxes                                                                      |       | (61,596                                           | )          | (90,745 | ) | 25,983 |   | (157,755 | ) | (99,743 | ) | (194.6 | ) |
| Net income  (loss) from continuing operations                                     |       | (2,002                                            | )          | (80,596 | ) | 77,243 |   | 65,831 |   | 100,276 |   | 195.7 |   |
| Cumulative  effect of changes in accounting principles, net of tax and MI         |       | 34,675                                            |       | — |   | (128 | ) | 1,250 |   | — |   | — |   |
| Income from  discontinued operations, net of tax and MI                           |       | 509                                               |       | 295 |   | 122 |   | — |   | — |   | — |   |
| Net income  (loss)                                                                |       | 33,182                                            |       | (80,300 | ) | 77,237 |   | 67,081 |   | 100,276 |   | 195.7 |   |
| Net income  (loss) on continuing operations per share in Ch$/U.S.$                |       | 3.98                                              |       | (9.82 | ) | 9.53 |   | 8.03 |   | 12.23 |   | 0.02 |   |
| Cumulative  effect of changes in accounting principles                            |       | —                                            |       | — |   | (0.02 | ) | 0.15 |   | — |   | — |   |
| US GAAP EPS  before discontinued operations                                       |       | 3.98                                              |       | (9.82 | ) | 9.51 |   | 8.18 |   | 12.23 |   | 0.02 |   |
| US GAAP EPS  from discontinued operations                                         |       | 0.06                                              |       | 0.03 |   | 0.02 |   | — |   | — |   | — |   |
| Net income  (loss) per share in Ch$/U.S.$                                         |       | 4.04                                              |       | (9.79 | ) | 9.53 |   | 8.18 |   | 12.23 |   | 0.02 |   |
| Net income  (loss)on continuing operations per ADS in Ch$/U.S.$                   |       | 119.34                                            |       | (294.63 | ) | 285.90 |   | 240.90 |   | 366.90 |   | 0.72 |   |
| Net income  (loss) on discontinued operations per ADS in Ch$/U.S.$                |       | 1.80                                              |       | 0.90 |   | 0.60 |   | — |   | — |   | — |   |
| Net income  (loss) per ADS in Ch$/U.S.$ (4)                                  |       | 121.14                                            |       | (293.73 | ) | 286.50 |   | 240.90 |   | 366.90 |   | 0.72 |   |
|                                                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| **Consolidated  Balance Sheet Data**                                              | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Chilean  GAAP:**                                                                | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total assets                                                                      |       | 6,822,906                                         |       | 6,997,329 |   | 5,803,640 |   | 5,509,095 |   | 4,874,471 |   | 9,511 |   |
| Long-term  liabilities                                                            |       | 3,006,376                                         |       | 2,639,610 |   | 2,431,364 |   | 2,270,508 |   | 1,770,548 |   | 3,455 |   |
| Minority  interest                                                                |       | 1,536,470                                         |       | 1,606,881 |   | 1,293,122 |   | 1,167,977 |   | 933,900 |   | 1,822 |   |
| Total  Shareholders’ equity                                                  |       | 1,551,450                                         |       | 1,534,383 |   | 1,585,065 |   | 1,625,378 |   | 1,642,259 |   | 3,204 |   |
| Capital  stock                                                                    |       | 1,115,201                                         |       | 1,115,201 |   | 1,115,201 |   | 1,115,201 |   | 1,115,201 |   | 2,176 |   |
| **U.S.  GAAP**                                                                    | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total assets                                                                      |       | 6,363,038                                         |       | 6,711,795 |   | 5,473,836 |   | 5,173,273 |   | 4,598,849 |   | 8,973.40 |   |
| Long-term  liabilities                                                            |       | 2,851,053                                         |       | 2,865,759 |   | 2,511,295 |   | 2,392,478 |   | 1,903,627 |   | 3,714.40 |   |
| Minority  interest                                                                |       | 1,567,330                                         |       | 1,635,500 |   | 1,251,117 |   | 1,077,407 |   | 856,688 |   | 1,671.60 |   |
| Total  Shareholders’ equity                                                  |       | 1,207,972                                         |       | 1,130,646 |   | 1,192,945 |   | 1,235,792 |   | 1,282,234 |   | 2,501.90 |   |
| Capital  stock                                                                    |       | 1,115,201                                         |       | 1,115,201 |   | 1,115,201 |   | 1,115,201 |   | 1,115,201 |   | 2,176.00 |   |

 

5

----

 
| ** **                                      | ** ** | **As of or for the year ended December 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                      | ** ** | **2001**                                          | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **MCh$**                                          | ** ** | **MCh$** | ** ** | **MCh$** | ** ** | **MCh$** | ** ** | **MCh$** | ** ** | **(millions of U.S.$) (1)** | ** ** |
| ** **                                      | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **MU.S.$** | ** ** |
| Other  Consolidated Financial Data              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| **Chilean  GAAP:**                              | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital  expenditures (5)                       |       | 56,814                                            |       | 144,638 |   | 139,258 |   | 99,597 |   | 58,780 |   | 115 |   |
| Depreciation  and amortization                  |       | 163,884                                           |       | 237,787 |   | 177,423 |   | 163,226 |   | 157,728 |   | 308 |   |
| Cash  dividends per share in Ch$/U.S.$ (3) |       | 1.05                                              |       | — |   | 2.38 |   | 4.28 |   | — |   | — |   |
| Cash  dividends per ADS in U.S.$ (2)(3)(4) |       | 0.04                                              |       | — |   | 0.11 |   | 0.23 |   | — |   | — |   |
| Weighted  average shares outstanding (million)  |       | 8,202                                             |       | 8,202 |   | 8,202 |   | 8,202 |   | 8,202 |   | 8,202 |   |
| Number of  ADS (million)                        |       | 28                                                |       | 16 |   | 14 |   | 14 |   | 14 |   | 14 |   |

 

----

(1)          Solely for the convenience of the reader,Chilean peso amounts have been translated into U.S. dollars at the rate ofCh$ 512.50 per U.S. dollar the Observed Exchange Rate as of December 31,2005.  You should not construe thetranslation of currency amounts in this annual report to be a representationthat the Chilean peso amounts actually represent current U.S. dollar amounts orthat you could convert Chilean peso amounts into U.S. dollars at the rateindicated or at any other rate.

 

(2)          Per ADS amounts in millions of constantChilean pesos are determined by multiplying per share amounts by 30 (1 ADS = 30Shares).  Per share amounts in millionsof U.S.$ are determined by dividing per ADS amounts by 30.

 

(3)          This chart details dividends payable inany given year, and not necessarily paid that same year.  2004 dividend was paid on April 18,2005.

 

(4)          U.S. dollar amounts are calculated byapplying the U.S. dollar exchange rate on the dividend payment date to thenominal Chilean peso amount.

 

(5)          Capital expenditures do not includeinvestments in equity investees and capital expenditures in development stagesubsidiaries.

 

(6)          For reconciliation from Chilean GAAP toU.S. GAAP, see Note 32, “Differences between Chilean and United StatesGenerally Accepted Accounting Principles”, of our Audited ConsolidatedFinancial Statements.

 

**Exchange Rates**

 

Fluctuations in the exchange rate between the Chileanpeso and the U.S. dollar will affect the U.S. dollar equivalent of the Chileanpeso price of Endesa Chile’s shares of common stock, without par value (the “Shares”or the “Common Stock”), on the Bolsa de Comercio de Santiago (the “SantiagoStock Exchange”), the Bolsa Electrónica de Chile (the “Electronic Exchange”)and the Bolsa de Corredores de Valparaíso (the “Valparaíso Stock Exchange”)(collectively, the “Chilean Exchanges”), and, as a result, will likely affectthe price of the Company’s American Depositary Shares (“ADSs”).  Such fluctuations will also affect conversionof cash dividends relating to the Shares represented by ADSs from Chilean pesosto U.S. dollars.  In addition, to theextent financial liabilities of the Company are denominated in foreigncurrencies, exchange rate fluctuations may have a significant impact onearnings.

 

In Chile, the Ley Orgánica del Banco Central de Chile No. 18,840(the “Central Bank Act”), enacted in 1989, liberalized the ability to buy andsell foreign exchange in Chile.  TheCentral Bank Act currently provides that the Central Bank may require thatcertain purchases and sales of foreign exchange be carried out in the MercadoCambiario Formal (the “Formal Exchange Market”), a market formed by banks andother entities explicitly authorized by the Central Bank.  Purchases and sales of foreign exchange,which are generally permitted to be transacted outside the Formal ExchangeMarket, can be carried out in the Mercado Cambiario Informal (the “InformalExchange Market”), which is a recognized currency market in Chile.  Free market forces drive both the Formal andInformal Exchange Markets.  Foreignexchange for payments and distributions with respect to the ADSs may bepurchased in either the Formal Exchange Market or the Informal Exchange Market,but such payments and distributions must be necessarily remitted through theFormal Exchange Market.

 

For purposes of the operation of the Formal ExchangeMarket, the Chilean Central Bank sets a reference exchange rate (*dólar acuerdo* or the “Reference Exchange Rate”).  The Reference Exchange Rate is reset daily bythe Central Bank, taking into account internal and external inflation andvariations in parities between the Chilean peso and each of the U.S. dollar,the Japanese yen and the Euro in a ratio of 80:5:15, respectively.  The daily observed exchange rate (*dólar observado*) (the “Observed Exchange Rate”) reported bythe Central Bank and

 

6

----

 

published daily in theChilean newspapers is computed by taking the weighted average of the previousbusiness day’s transactions in the Formal Exchange Market.

 

The Informal Exchange Market reflects transactionscarried out at informal exchange rates (the “Informal Exchange Rate”) byentities not expressly authorized to operate in the Formal Exchange Market (*e.g.*, certain foreign exchange houses, travel agencies andothers).  There are no limits imposed onthe extent to which the rate of exchange in the Informal Exchange Market canfluctuate above or below the Observed Exchange Rate.  Since 1993, the Observed Exchange Rate andthe Informal Exchange Rate have typically been within less than 1% of eachother.  On December 31, 2005, theInformal Exchange Rate was Ch$ 512.30, or 0.04% less than the publishedObserved Exchange Rate of Ch$ 512.50 per U.S.$ 1.00.  On February 28, 2006, the informalexchange rate was Ch$ 517.50 per U.S.$ 1.00, 0.03% greater than theObserved Exchange Rate corresponding to such date of Ch$ 517.33 perU.S.$ 1.00.  Unless otherwiseindicated, amounts translated to U.S. dollars were calculated based on theexchange rates in effect as of December 31, 2005.

 

The following table sets forth, for the periods anddates indicated, certain information concerning the Observed Exchange Ratereported by the Central Bank.  No representationis made that the Chilean peso or U.S. dollar amounts referred to herein couldhave been or could be converted into U.S. dollars or Chilean pesos, as the casemay be, at the rates indicated or at any other rate.  The Federal Reserve Bank of New York does notreport a noon buying rate for Chilean pesos.

 
| ** ** | ** ** | **Observed Exchange Rate (1)  (Ch$ per U.S.$)** | ** ** |
|------------|------------|------------------------------------------------------|------------|
| **Year**   | ** ** | **Low (2)**                                          | ** ** | **High (2)** | ** ** | **Average (3)** | ** ** | **Period-end** | ** ** |
| 2001       |       | 557.13                                               |       | 716.62 |   | 637.57 |   | 654.79 |   |
| 2002       |       | 641.75                                               |       | 756.56 |   | 692.32 |   | 718.61 |   |
| 2003       |       | 593.10                                               |       | 758.21 |   | 686.89 |   | 593.80 |   |
| 2004       |       | 557.40                                               |       | 649.45 |   | 611.11 |   | 557.40 |   |
| 2005       |       | 509.70                                               |       | 592.75 |   | 558.06 |   | 512.50 |   |

 
| ** **          | ** ** | **Observed Exchange Rate (1)  (Ch$ per U.S.$)** | ** ** |
|---------------------|------------|------------------------------------------------------|------------|
| **Last six months** | ** ** | **Low (2)**                                          | ** ** | **High (2)** | ** ** | **Average (3)** | ** ** | **Period-end** | ** ** |
| 2005                |       |                                                 |       |   |   |   |   |   |   |
| September           |       | 529.20                                               |       | 540.05 |   | — |   | 529.20 |   |
| October             |       | 526.56                                               |       | 546.92 |   | — |   | 543.49 |   |
| November            |       | 518.63                                               |       | 544.87 |   | — |   | 518.63 |   |
| December            |       | 509.70                                               |       | 518.38 |   | — |   | 512.50 |   |
| 2006                |       |                                                 |       |   |   |   |   |   |   |
| January             |       | 513.18                                               |       | 535.36 |   | — |   | 524.37 |   |
| February            |       | 516.10                                               |       | 532.35 |   | — |   | 517.33 |   |

 

----

**Source: Chilean Central Bank.**

 

(1)          Reflects Chilean pesos at historicalvalues rather than in constant Chilean pesos.

 

(2)          Exchange rates are the actual high andlow, on a day-by-day basis, for each period.

 

(3)          The average of the exchange rates on thelast day of each month during the period. This is not applicable to monthly data.

 

**B.**            Capitalizationand indebtedness.

 

Not applicable.

 

**C.**            Reasonsfor the offer and use of proceeds.

 

Not applicable.

 

7

----

 

**D.**            RiskFactors.

 

**Risks Relating to Our Operations in Every Country inWhich We Operate**

 

***Since our businessdepends heavily on hydrological conditions, drought conditions may hurt ourprofitability.***

 

Approximately 67% of our consolidated installedcapacity in Chile, Argentina, Colombia and Peru is hydroelectric.  Accordingly, adverse hydrological conditionsmay negatively affect our business and have a substantial influence over ourresults.

 

During periods of drought, thermal plants, includingthose that use natural gas, fuel oil or coal as a fuel, are dispatched morefrequently.  Our operating expensesincrease during these periods and, depending on the size of our commitments, wemay have to buy electricity from other parties in order to comply with our contractualsupply obligations.  The cost of theseelectricity purchases in the spot market may exceed the price at which we sellcontracted electricity, thus producing losses from those contracts.

 

In 2000, we established a commercial andrisk-reduction policy in order to mitigate the potential impact ofinterruptions to our ability to supply electricity, including those caused bydroughts, interruptions in gas supply and prolonged plant stoppages.  Pursuant to this policy, a volume ofcontracts is determined for each generation company that reduces the risks toacceptable levels, assured by a degree of statistical reliability of 95%.  Any contracts for volumes that exceed this95% level are required to include clauses transferring the risk ofinterruptions to the customers. Notwithstanding this risk reduction policy, a prolonged drought couldadversely affect our results.

 

***Regulatoryauthorities may impose fines on us.***

 

In Chile, our electricity businesses may be subject toregulatory fines for any breach of current regulations, including energy supplyfailure.  As of December 31, 2005,such fines may range from 1 Unidad Tributaria Mensual (“UTM”), equivalent toapproximately U.S.$ 62, to 10,000 Unidades Tributarias Anuales (“UTA”),equivalent to approximately U.S.$ 7.4 million.  Any electricity company supervised by theChilean Superintendency of Electricity and Fuels, or SEF, may be subject tothese fines, which apply in cases where, in the opinion of the SEF, operationalfailures that affect the regular energy supply to the system are the fault ofsuch company.  These fines may beappealed.  An electricity companysupervised by the SEF may be subject to fines when the electricity system isaffected by operating failures, even when it is not within such company’s powerto react to prevent such failures.

 

On August 14, 2003, the SEF imposed fines on usin an aggregate amount of 5,330 UTA, equivalent to approximately U.S.$ 3.9million, due to a failure in the transmission of energy in the MetropolitanRegion on September 23, 2002.  On April 27and May 3, 2004, the SEF imposed fines on us an aggregate amount of 2,030UTA, equivalent to approximately U.S.$ 1.5 million, due to a blackout thatoccurred in the Metropolitan Region on January 13, 2003.  On July 4, 2005, the SEF imposed fineson us of 1,260 UTA, equivalent to approximately U.S.$ 0.9 million, due toa blackout that occurred in the Metropolitan Region on November 7,2003.  We are currently appealing thesefines, but these appeals may not be successful.

 

***Governmentalregulations may impose additional operating costs which may reduce our profits.***

 

We are subject to extensive regulation of tariffs andother aspects of our business in the countries in which we operate, and theseregulations may affect our profitability adversely.  In addition, changes in the regulatoryframework, including changes that if adopted would significantly affect ouroperations, are frequently submitted to the legislators and administrativeauthorities in the countries in which we operate, and could have a materialadverse impact on our business.

 

In Chile, if we are unable to comply with ourcontractual obligations during electricity rationing periods, we may be subjectto higher operating costs.  The Chileangovernment can impose electricity rationing during drought conditions orprolonged failures in the country’s thermoelectric facilities.  If, during rationing, we are unable togenerate enough electricity to comply with our contractual obligations, we maybe forced to buy electricity in the pool market at the spot price, since adrought can no longer constitute a *force majeure*event.  The spot price may besignificantly higher than our costs to generate the electricity and can be ashigh as the “cost of failure” set by the *Comisión Nacional deEnergía* (National Energy Commission), or the CNE.  The “cost of failure” is determined by

 

8

----

 

the CNE’s economic modelsas the highest cost of electricity during periods of electricity deficit.  If we are unable to buy enough electricity inthe pool market to comply with all our contractual obligations, then we wouldhave to compensate our regulated customers for the volume we failed to provideat the “rationed end consumer price.”  Ifrationing policies are imposed by regulatory authorities in Chile, ourbusiness, financial condition and results of operations may be affectedadversely in a material way.

 

Similarly, if rationing policies are imposed by anyregulatory authority as a result of adverse hydrological conditions in thecountries in which we operate, our business, financial condition and resultsfrom operations may be adversely affected in a material way.  Rationing periods may occur in the future,and consequently our generation subsidiaries may be required to pay regulatorypenalties if such subsidiaries fail to provide adequate service under suchconditions.

 

Approximately 76% of the installed capacity of ourChilean generation subsidiaries is hydroelectric.  These generation companies own unlimitedduration unconditional and absolute property water rights granted by theChilean Water Authority.  However, in March 2005,the Chilean Congress approved a modification to the current laws governingunused water rights.  Under the amendedlaw, beginning on January 1, 2006, Chilean generation companies will haveto pay an annual license fee for unused water rights.  We are continuously analyzing which waterrights we will maintain for the future and which we will disregard.  If we determine that some water rights willnot be used for a future project, we will abandon such water rights in order toavoid liability for license fees.  Weestimate that in the event that we do not abandon any water rights in the SIC,we will have to pay license fees aggregating no more than 5,773 UTA (equivalentto approximately U.S.$ 4.3 million) per year.  License fee payments carried out during theeight years before the commencement of any project, or the use of such water rights,may be recovered through a tax credit that is applied monthly until the licensefee payments are recovered in full.

 

In the case of water rights located in the extremesouth of Chile (in particular, the eleventh and twelfth regions, outside thearea comprised by the SIC), the license fees will be paid starting as of January 1,2012, using the same tax refund regime mentioned above for the SIC.

 

In May 2001, the Ministry of Economy issuedResolution 88, under which electricity generators such as ours are required toprovide electricity to distribution companies that have been unable to contractadequate supply to deliver to their customers. The last amendment to the electricity law, called Short Law II,established a mechanism of transitory compensations, under which until December 31,2008, energy sales derived from Resolution 88 must be carried out at the spotprice.  Short Law II thereforetemporarily alleviates for our subsidiaries some of the pricing risks implicitin Resolution 88.  For a more completediscussion of this topic, see “Item 4. Information on the Company B. BusinessOverview—Electricity Generation in Chile–Industry Structure and RegulatoryFramework”.

 

***Environmentalregulations in the countries in which we operate may increase our costs ofoperations.***

 

Our operating subsidiaries are also subject toenvironmental regulations, which, among other things, require us to performenvironmental impact studies for future projects and obtain permits from bothlocal and national regulators.  Approvalof these environmental impact studies may be withheld by governmentalauthorities, public opposition may result in delays or modifications to anyproposed project, and laws or regulations may change or be interpreted in amanner that could adversely affect our operations or our plans for companies inwhich we hold investments.  See “Item 4.Information on the Company–D.  Property,plants and equipment—Environmental Issues.”

 

***Foreign exchangerisks may affect our results from operations and financial condition adversely.***

 

The Chilean peso and the other South Americancurrencies in which we and our subsidiaries operate have been subject to largedevaluations and appreciations against the U.S. dollar in the past and may besubject to significant fluctuations in the future.  Historically, a significant portion of ourconsolidated indebtedness has been denominated in U.S. dollars and, although asubstantial portion of our revenues are linked in part to U.S. dollars, wegenerally have been and will continue to be materially exposed to fluctuationsof our local currencies against the U.S. dollar because of time lags and otherlimitations in the indexation of our tariffs to the U.S. dollar.

 

Because of this exposure, the cash generatedby our subsidiaries can be diminished materially when our local currenciesdevalue against the U.S. dollar.  Forexample, in the case of our Argentine subsidiaries, regulatory

 

9

----

 

changes introduced in 2002 eliminated U.S. dollar indexation of ourtariffs altogether, which together with a devaluation of approximately 71% ofthe Argentine peso against the U.S. dollar and “pesification” of ourcontractual rates, resulted in a reduction of net cash generation.  Future volatility in the exchange rate of theChilean peso, and the other currencies in which we receive revenues or incurexpenditures, to the U.S. dollar, may affect our financial condition andresults from operations.  For moreinformation on the risks associated with foreign exchange rates, see “Item 11.Quantitative and Qualitative Disclosures About Market Risk.”

 

As of December 31, 2005, Endesa Chile had totalconsolidated indebtedness (net of currency hedging instruments), ofU.S.$ 3,859 million, of which U.S.$ 2,590 million, or approximately67%, was denominated in U.S. dollars. For the twelve-month period ended December 31, 2005, our revenuesamounted to U.S.$ 2,191 million (before consolidation adjustments) ofwhich U.S.$ 402 million, or approximately 18%, were denominated in U.S.dollars, and U.S.$ 981 million, or approximately 45%, were linked in someway to the U.S. dollar.  In theaggregate, approximately 63% of our revenues (before consolidation adjustments)were either in U.S. dollars or correlated to such currency through some form ofindexation.  On the other hand, theequivalent of U.S.$ 99 million were revenues in pesos, which representsapproximately 5% of our 2005 revenues (before consolidation adjustments).

 

In addition to the U.S. dollar and the Chilean peso,our foreign currency denominated consolidated indebtedness included theequivalent of U.S.$ 491 million in Colombian pesos, U.S.$ 133 millionin Peruvian soles, U.S.$ 23 million in Argentine pesos, and none inBrazilian reais, for an aggregate of U.S.$ 647 million in currencies otherthan Chilean pesos and U.S. dollars.  Atthe same time, revenues before consolidation adjustments in these othercurrencies for the twelve-month period ended December 31, 2005, includedthe equivalent of U.S.$ 1,762 million in Brazilian reais, U.S.$ 1,077million in Colombian pesos, U.S.$ 752 million in Argentine pesos, andU.S.$ 489 million in Peruvian soles. Although we both generate revenues and incur debt in these samecurrencies, we believe that we are exposed to foreign exchange exposure risk inthese four currencies.  The most materialcase is that of Argentina, where most of our debt is denominated in U.S.dollars while our revenues are mostly in Argentine pesos.

 

***We may be subjectto refinancing risk.***

 

As of December 31, 2005, on a consolidated basis,we had U.S.$ 645 million of indebtedness maturing in 2006, U.S.$ 204million in 2007, U.S.$ 1,705 in 2008 through 2010, and U.S.$ 1,302million maturing thereafter.

 

As of the same date we had short-term indebtedness ofU.S.$ 410 million in Chile, U.S.$ 102 million in Colombia,U.S.$ 74 million in Peru, and U.S.$ 59 million in Argentina.

 

We are subject to certain fairly standard financialcovenants related to maximum ratios of indebtedness to adjusted cash flow,indebtedness to EBITDA, debt to equity and minimum ratios of adjusted cash flowto interest expense.  In addition,substantially all of our indebtedness contains cross-default provisions,generally triggered by default on other indebtedness in amounts exceedingU.S.$30 million on an individual basis. In the event that any of our cross-default provisions are triggered andour existing creditors demand immediate repayment, a significant portion ofEndesa Chile’s indebtedness, on a stand-alone basis, could become due andpayable.  For more information on some ofthese covenants and certain relevant provisions for these credit facilities,see “Item 5. Operating and Financial Review and Prospects—B. Liquidity andCapital Resources.”

 

We may be unable to refinance our indebtedness orobtain such refinancing on terms acceptable to us.  In the absence of such refinancing, we couldbe forced to dispose of assets in order to make up for any shortfall in thepayments due on our indebtedness under circumstances that might not befavorable to obtaining the best price for such assets.  Furthermore, assets may not be sold quicklyenough, or for amounts sufficient to enable us to make such payments.

 

As of the date of this report Argentina is the countrywith the highest refinancing risk.  As ofDecember 31, 2005, the third-party financial debt of our Argentinesubsidiaries (Endesa Costanera and El Chocón) amounted toapproximately U.S.$ 210 million.  Asa matter of policy for all of our Argentine subsidiaries, as long as the foreigncurrency restrictions remain in Argentina, and as long as fundamental issuesconcerning the electricity sector remain unresolved, we are primarily makinginterest payments when due and we are rolling over most of our outstanding debt.  Our international creditors have understoodthe extraordinary circumstances that have led us to take these steps and todate have accepted these refinancing arrangements.  If our creditors do not continue to accept,or the

 

10

----

 

Argentine Central Bankwill not continue to permit, rolling over debt principal when it becomes due,we may be unable to refinance our indebtedness on terms acceptable to us.

 

***We depend in parton payments from our subsidiaries and related companies to meet our paymentobligations.***

 

In order to pay our obligations, we rely in part oncash from dividends, loans, interest payments, capital reductions and otherdistributions from our subsidiaries.  Theability of our subsidiaries to pay dividends, interest payments, loans andother distributions to us is subject to legal constraints such as dividendrestrictions, fiduciary duties, contractual limitations, and foreign exchangecontrols that may be imposed in any of the five countries where oursubsidiaries operate.  Our subsidiariesand equity affiliates may be additionally limited by their operating results.

 

We have generally been able to access the cash flowsof our Chilean subsidiaries.  We have notbeen similarly able to access the cash flows of our non-Chilean operatingsubsidiaries due to government regulations, strategic considerations, economicconditions, and credit restrictions.

 

Our future results from operations outside Chile maycontinue to be subject to greater economic and political uncertainties thanwhat we have experienced in Chile, thereby reducing the likelihood that we willbe able to rely on cash flow from operations in those entities to repay ourdebt.

 

*Dividend Limits and Other Legal Restrictions*. We and our Chilean subsidiaries are subject to customary legalrestrictions limiting the amount of dividend distributions.  Some of our non-Chilean subsidiaries are alsosubject to legal reserve requirements and other restrictions on dividendpayments.  In addition, the ability ofany of our less-than-wholly-owned subsidiaries to upstream cash to us may belimited by the fiduciary duties of the directors of such subsidiaries to theirminority shareholders.  As a consequenceof such duties, our subsidiaries could, under certain circumstances, beprevented from upstreaming cash to us.

 

*Contractual Constraints*. Upstreaming restrictions in our subsidiaries’ contractual agreementsinclude:

 

•                  prohibitions againstdividend distributions by Pangue, our Chilean generation subsidiary, if it isnot in compliance with certain debt to equity ratios and debt coverage ratios(each as defined in Pangue’s credit agreements);

 

•                  prohibitions againstdividend distributions by Edegel in Peru, and Betania in Colombia in the caseof default of certain loans;

 

•                  prohibitions againstrepayments by Betania of intercompany debt unless it raises additional fundsfrom the sale of assets or capital reductions of Emgesa, and against paymentsof interest on intercompany debt if any scheduled payment of Betania’ssyndicated loan is due and not paid;

 

•                  prohibitions against dividenddistributions, capital reductions, intercompany interest payments and debtrepayment by Endesa Costanera in Argentina, in each case in the case ofdefault and if not in compliance with certain financial ratios.

 

*Operating Results of Our Subsidiaries*. The ability of our subsidiaries and equity affiliates to pay dividendsor make loan payments or other distributions to us is limited by theiroperating results.  To the extent thatthe cash requirements at any of our subsidiaries exceeds available cash, suchsubsidiary will not be able to make cash available to us.

 

*Foreign Exchange Controls*. The ability of our non-Chilean subsidiaries and equity affiliates to paydividends and make loan payments or other distributions to us may be subject toemergency restrictions that may be imposed by Central Banks or othergovernmental authorities in the various jurisdictions in which we operate.  For example, during the economic crisis inArgentina, the Central Bank of Argentina imposed restrictions on the transferof funds outside of Argentina.

 

11

----

 

***The Argentinenatural gas crisis has increased the vulnerability of the electricity sector inChile.***

 

In Argentina, the low price imposed by regulators onnatural gas has directly affected production and investment in natural gasfields, which has in turn impacted the short- and medium-term availability ofthis fuel in Chile.  A natural gasshortage may force electricity generation companies, including ours, to usemore expensive fuel oil, thus substantially increasing production costs.  Strong demand for electricity in Chile’scentral region, which increased by 4.5% in 2005 and is expected to continue toincrease significantly in the foreseeable future, combined with a low level ofinvestment in the electricity sector, makes the Chilean electricity sectorparticularly exposed to the adverse effects of the Argentine natural gascrisis.

 

In Chile’s central region, our thermal plants SanIsidro and Taltal use natural gas for thermal generation and have gas contractswith Argentine suppliers.  The Argentinegovernment has adopted a resolution allowing governmental authorities topartially suspend natural gas exports and giving the President of Argentina thepower to temporarily suspend the long-term supply contracts of Argentineexporters.  Since then, Argentina hassignificantly curtailed its natural gas exports to Chile.  As a result, the Chilean electricity sectoris more vulnerable than in the past.

 

***Construction ofnew facilities may be affected adversely by factors associated with newconstruction projects.***

 

Factors that may adversely affect our ability to buildnew facilities include:

 

•                  delays in obtainingregulatory approvals, including environmental permits;

 

•                  shortages or changes in theprices of equipment, materials or labor;

 

•                  local opposition ofpolitical, environmental and ethnic groups;

 

•                  adverse changes in thepolitical and regulatory environment in the countries where we and our relatedcompanies operate;

 

•                  adverse weather conditions,which may delay the completion of power plants or substations, or naturaldisasters, accidents or other unforeseen events; and

 

•                  the inability to obtainfinancing at affordable rates.

 

Any of these factors may cause delays in the completionof all or part of our capital investments program and may increase the cost ofthe projects.

 

***We are currentlyinvolved in various litigation proceedings, which could result in unfavorabledecisions or financial penalties for us, and we will continue to be subject tofuture litigation proceedings, which could have material adverse consequencesto our business.***

 

We are party to a number of legal proceedings, some ofwhich have been pending for several years. Some of these claims may be resolved against us.  Our financial condition or results ofoperations could be adversely affected to a material extent if certain of thesematerial claims are resolved against us. See “Item 8. Financial Information—A. Consolidated Statements and OtherFinancial Information—Legal Proceedings.”

 

***There may bepotential conflicts of interest with our affiliates which could adverselyaffect our business.***

 

Endesa-Spain currently owns 60.6% of Enersis’ sharecapital, and Enersis has a 60.0% share interest in Endesa Chile.  Therefore, Endesa-Spain and Enersis have thepower to determine the outcome of most material matters to be decided by a voteof our shareholders, such as the election of the majority of our board membersand, subject to contractual and legal restrictions, the distribution ofdividends.  Endesa-Spain and Enersis canalso exercise influence over our operations and business strategies.  Endesa-Spain conducts its business in SouthAmerica through Enersis and Endesa Chile, and through affiliates notconsolidated by us.

 

12

----

 

Certain of our directors are officers of Endesa-Spainand officers and directors of certain subsidiaries of Endesa-Spain.  For more information about these directorsplease refer to “Item 6. Directors, Senior Management and Employees — Directorsand Senior Management.”

 

We sell electricity to other companies controlled byEndesa-Spain at regulated prices and have entered into contracts for otherservices with other companies under the common control of Endesa-Spain or the “EndesaGroup.”

 

To the extent any conflict arises between ourinterests and those of Endesa-Spain’s other businesses in any jurisdiction inSouth America, Endesa-Spain may have a conflict of interest, which could havean adverse effect on our business.

 

***We haveoutstanding credit facilities with “change of control” provisions which couldresult in acceleration rights on such indebtedness.***

 

At the time of this report, two companies have madetender offers for the control of ENDESA, S.A. (“Endesa-Spain”), which owns60.6% of Enersis, our direct parent company.  In this context, some of our credit facilitieshave “change of control” contractual provisions.  As of December 31, 2005, U.S.$ 600million of Endesa Chile’s consolidated indebtedness had some kind of “change ofcontrol” provision, either in the form of a negative covenant, a mandatoryprepayment or otherwise.  However, ofthat amount, U.S.$ 458 million in Endesa Chile’s subsidiaries’ contractseither (a) require a preliminary merger or spin-off prior to triggeringsuch change of control provision, or (b) the change of control provisiondoes not apply to Endesa-Spain but to other companies instead.

 

A total of U.S.$ 130 million in bank indebtednessincurred by Endesa Chile has “change of control provisions” which specificallyrefer to Endesa-Spain, directly or indirectly, as the controlling entity.  If a change of control were to take place,Endesa Chile, and our subsidiaries, would need to seek the appropriatecontractual waivers or amendments.

 

This U.S.$ 130 million of Endesa Chile bankindebtedness subject to “change of control” provisions is found in revolvingcredit instruments governed by the laws of New York, in which lenders on anindividual basis, would be given rights to accelerate payment in the event thatEndesa-Spain is no longer, directly or indirectly, the ultimate controllingparent, and the new controlling entity has a rating inferior (including withrespect to outlook) to the unsecured long-term foreign currency rating ofEndesa-Spain, as rated by each of S&P and Moody’s immediately prior togiving effect to a transaction involving a change of control, as defined.  Endesa-Spain’s current ratings are “A3 withnegative outlook” from Moody’s, “A with negative outlook” from S&P and “Awith negative watch” from Fitch.

 

If a tender offer for Endesa-Spain is successful, andif a change of control were to take place, we cannot give assurances that ourlenders and relevant governmental entities would waive acceleration rights thatthey might otherwise have under such credit agreements.  For information on the recent tender offersover Endesa-Spain, see “Item 4. Information on the Company—A. History andDevelopment of the Company—Recent Developments.” For more detailed informationon Endesa Chile’s contractual provisions, see “Item 5.  Operating and Financial Review andProspects—B. Liquidity & Capital Resources.”

 

***The values of ourlong-term energy supply contracts are subject to fluctuations in the marketprices of certain commodities.***

 

We have economic exposure to fluctuations in themarket prices of certain commodities as a result of the long term energy salescontracts we have entered into.  We havematerial obligations under long-term fixed-price electricity sales contracts, thevalues of which fluctuate with the market price of electricity.  In addition, our generation subsidiaries havematerial obligations as selling parties under long-term energy supply contractswith prices that vary in accordance with the market price of electricity, waterlevels in our reservoirs, the market prices of primary materials such asnatural gas, oil, coal and other energy-related products, as well as theexchange rate of the U.S. dollar. Changes in the market price of these commodities and in the exchangerate do not always correlate with changes in the market price of electricity orwith our cost of production of electricity; accordingly, there may be timeswhen the price paid to us under these contracts is less than our cost ofproduction or acquisition of electricity. We do not carry out transactions incommodity derivative instruments to manage our exposure to commodity price

 

13

----

 

fluctuations.  Under Chilean GAAP, our income statement doesnot reflect fluctuations of the fair value of our long-term energy contracts,although we are required to do so under U.S. GAAP.  Our policy is to not enter into supplycontracts for amounts exceeding our firm capacity under adverse hydrologicalconditions.  For further discussion,please refer to “Item 11. Quantitative and Qualitative Disclosures About MarketRisk—Commodity Price Risk” in this annual report.

 

**Risk Factors Relating to Chile**

 

***Our business isdependent on the Chilean economy and our revenues are sensitive to itsperformance.***

 

A substantial portion of our assets and operations arelocated in Chile and, accordingly, our financial condition and results ofoperations are to a certain extent dependent upon economic conditionsprevailing in Chile.  In 2005, theChilean economy grew by an estimated 6.3% compared to a 6.1% increase in2004.  The latest Chilean Central Bankestimate for growth in 2006 is in the range of 5.25%-6.25%.  There is no assurance that such growth willbe achieved, that the growth trend will continue in the future, or that futuredevelopments in the Chilean economy will not impair our ability to proceed withour strategic plans or impact our financial condition or results fromoperations adversely.  Our financialcondition and results from operations could also be affected by changes ineconomic or other policies of the Chilean government, which has exercised andcontinues to exercise a substantial influence over many aspects of the privatesector.  In addition, our financialcondition and results from operations could also be affected by other politicalor economic developments in Chile as well as regulatory changes oradministrative practices of Chilean authorities, over which we have no control.

 

***Increasedinflation in Chile may affect our results from operations adversely.***

 

Although Chilean inflation has been low in recentyears, Chile has experienced high levels of inflation in the past.  High levels of inflation in Chile couldaffect the Chilean economy adversely and, indirectly, the value of shares ofour common stock and ADSs.  The ChileanConsumer Price Index, or Chilean CPI, for the 12 months ended December 31,2005, was 3.7%, and government officials estimate Chilean CPI to beapproximately 3.2% and 2.8% for 2006 and 2007, respectively.  Historically, a substantial part of ourexpenses have been denominated in Chilean pesos, and future increases inChilean inflation could cause our expenses to rise significantly.  As a result, the level of Chilean inflationmay affect our financial condition and results from operations.

 

We believe that moderate inflation will not materiallyaffect our business in Chile. Electricity tariffs in Chile contain indexing mechanisms that areintended to neutralize the effects of inflation.  However, we believe that the performance ofthe Chilean economy, our operating results, and the value of securities issuedby us, may be affected adversely if inflation levels were to risesignificantly.

 

***Lawsuits againstus brought outside Chile or complaints against us based on foreign legalconcepts may be unsuccessful.***

 

We are incorporated under the laws of Chile andsubstantially all of our assets are located in Chile or outside the UnitedStates.  All of our directors andofficers reside outside the United States, and most of their assets are locatedoutside the United States as well.  Ifany shareholder were to bring a lawsuit against our directors, officers orexperts in the United States, it may be difficult for him to effect service oflegal process within the United States upon these persons or to enforce againstthem, in United States courts or Chilean courts, judgments obtained in UnitedStates courts based on the civil liability provisions of the federal securitieslaws of the United States.  In addition,there is doubt as to whether an action could be brought successfully in Chileon the basis of liability based solely upon the civil liability provisions ofthe United States federal securities laws.

 

***Foreign exchangerisks may affect the U.S. dollar amount of dividends payable to holders of ourADSs adversely.***

 

Chilean trading in the shares of common stockunderlying the ADSs is conducted in pesos. Our depositary bank will receive cash distributions that we make withrespect to the shares underlying the ADSs in pesos.  The depositary will convert such pesos toU.S. dollars at the then prevailing exchange rate to make dividend and other distributionpayments in respect of ADSs.  If theChilean peso depreciates against the U.S. dollar, the value of the ADSs and anydistributions ADS holders receive from the depositary may decrease.

 

14

----

 

***The relativeilliquidity and volatility of Chilean securities markets could affect the priceof our ADSs and common stock adversely.***

*** ***

Chilean securities markets are substantially smallerand less liquid than the major securities markets in the United States.  In addition, Chilean securities markets maybe affected materially by developments in other emerging markets, particularlyother countries in South America.  Thelow liquidity of the Chilean market may impair the ability of holders of ADSsto sell shares of our common stock withdrawn from the ADS program into theChilean market in the amount and at the price and time they wish to do so.

 

**Risk Factors Relating to the Rest of South America**

** **

***South Americaneconomic fluctuations are likely to affect our results from operations.***

*** ***

All of our operations are located in SouthAmerica.  Although we originally operatedonly in Chile, we have, through strategic acquisitions and investments,expanded our operations throughout South America.  In 2005, we generated approximately 55% ofour consolidated operating revenues and approximately 59% of our consolidatedoperating income outside Chile. Accordingly, our consolidated revenues are sensitive to the performanceof the South American economies as a whole. If local, regional or worldwide economic trends adversely affect theeconomy of any of the countries in which we have investments or operations, ourfinancial condition and results from operations could be affected adversely.

 

The South American financial and securities marketsare, to varying degrees, influenced by economic and market conditions in otheremerging market countries.  Althougheconomic conditions are different in each country, investor reaction todevelopments in one country can have significant effects on the securities ofissuers in other countries, including Chile. Chilean financial and securities markets may be affected adversely byevents elsewhere, especially in other emerging markets, and such effects mayaffect the value of or the interest rate yields in the secondary markets forour debt securities.  Moreover, we havesignificant investments in relatively risky non-Chilean countries such asArgentina, Brazil, Colombia and Peru. Generation and upstreaming of cash from subsidiaries in these countrieshave proven to be volatile.

 

***Certain SouthAmerican economies have been characterized by frequent and occasionally drasticintervention by governmental authorities, which may affect our businessadversely.***

*** ***

Governmental authorities have often changed monetary,credit, tariff and other policies to influence the course of the economy ofArgentina, Brazil, Colombia and Peru.  These governments’ actions to controlinflation and effect other policies have often involved wage, price and tariffrate controls as well as other interventionist measures, which have includedfreezing bank accounts and imposing capital controls.  Changes in the policies of these governmentalauthorities with respect to tariff rates, exchange controls, regulations andtaxation could affect our business and financial results adversely, as couldinflation, devaluation, social instability and other political, economic ordiplomatic developments, including the response by governments in the region tosuch circumstances.  If governmentalauthorities intervene in any of the countries in which we operate, it couldcause our business to be less profitable, and our results from operations maybe affected adversely.

 

**Risk FactorsRelating to Argentina**

 

***The Central Bankof Argentina lifted, but may reinstate, restrictions on the transfer of fundsoutside of Argentina which could prevent our Argentine subsidiaries fromdistributing dividends and paying principal on certain of their external debtas it comes due.***

*** ***

From December 3, 2001 to May 6, 2003, theArgentine government imposed a number of monetary and currency exchange controlmeasures that included restrictions on the free transfer of funds depositedwith banks and severe restrictions on transferring funds abroad (includingpayments of dividends, principal and interest on debt), with certain exceptionsfor transfers related to foreign trade and other authorized transactions.  The restrictions, requiring the ArgentineCentral Bank’s prior authorization for the transfer of funds abroad in order tomake payments of principal and/or interest, were gradually relaxed from January toMay 2003.

 

15

----

 

Currently, funds may be transferred abroad without theprior authorization of the Argentine Central Bank in order to pay dividendscorresponding to prior periods provided that independent accountants havecertified the financial statements for such period.

 

There can be no assurance, however, that the ArgentineCentral Bank will not once again require its prior authorization for thetransfer of funds abroad for principal and/or interest payment by any of ourArgentine subsidiaries to their foreign creditors or for dividend payments byour Argentine subsidiaries to their shareholders.

 

Should the Argentine Central Bank reimposerestrictions on the transfer of funds outside of Argentina that prevent ourArgentine subsidiaries from paying principal on certain of their external debt,a substantial portion of their debt obligations may become due and payable,unless new financing is funded outside Argentina and is available to ourArgentine subsidiaries or they are able to renegotiate, or obtain a waiver withrespect to the indebtedness that would be subject to such restrictions.  If similar restrictions are imposed again,our Argentine subsidiaries may not be able to obtain new financing or be able torenegotiate or obtain waivers with respect to indebtedness subject to foreignexchange restrictions.  In addition, suchrestrictions may impede the ability of our Argentine subsidiaries to make cashdistributions to us.

 

As of December 31, 2005, the third-partyfinancial debt of our Argentine subsidiaries (Endesa Costanera andEl Chocón) amounted to approximately U.S.$ 341 million. As a matterof policy for all of our Argentine subsidiaries, as long as the foreigncurrency restrictions remain in Argentina, and as long as fundamental issuesconcerning the electricity sector remain unresolved, we are primarily makinginterest payments when due, as permitted by the Argentine Central Bank, and weare rolling over most of our outstanding debt. Our international creditors have understood the extraordinarycircumstances that have led us to take these steps and to date have acceptedthese refinancing arrangements.  If ourcreditors do not continue to accept, or the Argentine Central Bank will notcontinue to permit, rolling over debt principal when it becomes due, we may beunable to refinance our indebtedness on terms acceptable to us.

 

A substantial portion of the Argentine public debt wasrestructured in March 2005, but such restructuring continues to be subjectto litigation.  The Argentine governmentused its financial reserves in order to prepay a portion of U.S.$ 9.5billion in debt held with the International Monetary Fund.  The significant reduction in reserves couldaffect the government’s capacity to react to local or foreign risks in theshort- and medium-term.

 

***Electricityshortfalls in Argentina adversely affect our transmission and trading businessin Brazil as well as our Argentine generation export business.***

 

The insufficient electricity available in Argentinadid not allow Argentine generators, among them, Endesa Costanera (“ENCO”),our Argentine generation subsidiary, to fully comply with export contracts toBrazil in 2005, and created conflicts for generators who export electricity toCEMSA and CIEN, the transmission companies, as well as conflicts between CIENand its Brazilian clients.

 

CIEN has been unable to fulfill some of itsclient-contracts, given that those contracts call exclusively for Argentineelectricity.  Those clients detained somepayments to CIEN, and CIEN in turn stopped certain payments to ENCO.

 

On December 9, 2005, the Argentine and Braziliangovernments signed an MOU (Memorandum of Understanding), which facilitates theoperation of export contracts without the imposition of fines for anyincompliance, through a transitional period ending December 31, 2008.  By that time, the assumption is that the fullArgentine electricity supply should be reestablished.  Under this MOU, ENCO requested from CIEN andCEMSA, either a contractual amendment in order to restore the financial andeconomic equilibrium provisions which would result in a price increase, oralternatively, the rescission of the export contracts.

 

Nevertheless, we cannot give assurances that ENCO willbe able to achieve a desired financial and economic equilibrium or otherwiserescind its export contracts.

 

16

----

 

**Risk Factors Relating to Colombia**

 

***Formation of anelectronic contract system could affect our business in Colombia.***

 

The Commission for the Regulation of Energy and Gas(CREG) is promoting the creation of an electronic electricity exchange similarto a financial market.  This would serveto increase the levels of competition and transparency in energy transactionsbetween the different market players. However, according to preliminary documentation, the contracting partieswould not be able to evaluate the creditworthiness of their counterparts.  If, in the future, we are forced to conducttransactions through an electronic electricity exchange which does not allow usto assess counterparty credit risk, we will be exposed to a greater risk ofpayment and non-performance default, which may adversely affect our revenues.

 

**Risk Factors Relating to Peru**

** **

***We may sufferlosses as a result of satisfying non-contracted demand from regulated customersat the node price instead of the spot price of electricity.***

*** ***

In 2004, generators in Peru agreed to satisfy thenon-contracted demand of the regulated market at the node price through2007.  Each generator would supply energyin proportion to its share of the country’s installed capacity.  This agreement exposes the company topossible losses as a result of differences between the node price and themarginal cost of electricity because the company may be required to purchase electricityat higher prices in the spot market and resell it at fixed node prices.  The average spot market price in 2005 reachedapproximately 63 U.S. dollars per MWh while the node price averagedapproximately 40 U.S. dollars per MWh. The problem persisted in 2005, although distributors have increased theamount of contracted demand. Consequently, the total amount of non-contracted electricity demand from regulatedcustomers has declined since 2004.  The “Comitéde Operación Económica del Sistema” (COES) has continued to allocate generatorsthe demand in excess of contracted energy and capacity which distributioncompanies withdraw from the system. There is no assurance as to what the pricedifference will be between the average spot price in the electricity market andthe node price in the future nor what amount of non -contracted electricitywill be absorbed by our Company.

 

**Item4.**           Information on the Company

 

**A.**            Historyand Development of the Company.

 

***Incorporation andContact Information of the Company***

 

The Company is a publicly held limited liability stockcompany incorporated under the laws of the Republic of Chile on December 1,1943 with the legal name Empresa Nacional de Electricidad S.A. (“EndesaChile”).  Since 1943 the Company has beenregistered in Santiago with the SVS under Registration No. 0114.  The Company is commercially referred to asboth Endesa and/or Endesa Chile.

 

The Company’s contact information in Chile is:

 
| Main office:     |   | Santa Rosa 76,  Santiago, Chile         |
|------------------|--------|-----------------------------------------|
| Mailing Address: |   | Casilla 1392,  Correo Central, Santiago |
| Telephone:       |   | (562) 630 9000                          |
| Fax:             |   | (562) 635 3938                          |

 

The Company’s authorized representative in the UnitedStates of America is Puglisi & Associates, whose contact informationis:

 
| Main office:     |   | 850 Library  Avenue, Suite 204, Newark, Delaware |
|------------------|--------|-------------------------------------------------------|
| Mailing Address: |   | P.O. Box  885, Newark, Delaware, 19711           |
| Telephone:       |   | (302) 738-6680                                        |
| Fax:             |   | (302) 738-7210                                        |

 

17

----

 

***Development of theCompany***

 

The Chilean government owned Endesa Chile for 44 yearsafter its incorporation in 1943.  TheChilean government commenced Endesa Chile’s privatization process in 1987through a series of public offerings. The privatization process was completed in 1989.

 

In May 1992, Endesa Chile began its internationalexpansion program with the following acquisitions:

 

•                  we acquired a stake inEndesa Costanera S.A. (now “Endesa-Costanera”) in 1992 and later, in August 1993,we acquired a controlling equity interest in El Chocón S.A., both inArgentina;

 

•                  we acquired Edegel in Peruin October 1995;

 

•                  we acquired Betania andEmgesa, both in Colombia, in December 1996 and in October 1997,respectively, and

 

•                  we acquired CachoeiraDourada in Brazil in September 1997.

 

ENERSIS S.A. (“Enersis”), a Chilean, publiclyheld holding company with subsidiaries engaged primarily in the generation,transmission and distribution of electricity in Chile, Argentina, Brazil,Colombia and Peru, beneficially owns, as of the date of this annual report, 60%of Endesa Chile’s outstanding capital stock. In May 1999, Enersis, which at the time owned 25.3% of EndesaChile, purchased an additional 34.7% of Endesa Chile on the Santiago StockExchange and the NYSE.  There have beenno material changes in the ownership structure of the company since then.  As of the date of this report, ENDESA S.A (“Endesa-Spain”)owns a 60.6% beneficial interest in Enersis.

 

Endesa Chile’s shares are publicly traded on the *Bolsa de Comercio de Santiago, Bolsa de Valores* (the “SantiagoStock Exchange”), the *Bolsa Electrónica deChile, Bolsa de Valores*(the “Electronic Stock Exchange”) and the *Bolsa de Corredores, Bolsa de Valores* (the “Valparaíso StockExchange”).  Endesa Chile’s AmericanDepositary Shares (ADS) have been listed on the New York Stock Exchange since July 1994.  Shares of Endesa Chile have also been listedand traded on the *Bolsa de Valores Latinoamericanos de laBolsa de Madrid*, or Latibex, since December 2001.

 

***Investments,Capital Expenditures and Divestitures***

*** ***

Our capital expenditures at December 31 of eachyear were U.S.$ 221 million (Ch$ 131 billion at December 31,2003) in 2003, U.S.$ 162 million (Ch$ 90 billion at December 31,2004) in 2004, and U.S.$ 108 million (Ch$ 56 billion at December 31,2005) in 2005.  Our capital expendituresand investments during 2005 included investments of U.S.$ 27.9 million(Ch$ 14.3 billion) mainly in Chile and Peru and capital expendituremaintenance of U.S.$ 80.5 million (Ch$ 41.26 billion) in all ouroperating subsidiaries.  Currently, weexpect to make capital expenditures of approximately U.S.$ 1.52 billion(Ch$ 778 billion at December 31, 2005) over the next five years.  Although we have considered assumptions onhow these investments will be financed as part of the Company’s budget process,we have not committed to any financial structure and it will depend on themarket conditions at the time the cash flows are needed.

 

The board of Endesa Chile, at its meeting held onDecember 15, 2005, approved proceeding with Mitsubishi Corporation inconstruction of the San Isidro Plant Expansion Project.  The San Isidro Plant will have a maximumcapacity in combined cycle with liquid natural gas (LNG) of 377 MW, and isexpected to start operating in open cycle on March 31, 2007.  The operation in combined cycle would come intoservice at the end of February 2008. The investment cost is expected to be U.S.$ 200 million.

 

The company is working on the construction of the 32MW Palmucho pass-through hydroelectric plant. The investment is expected to cost U.S.$ 32 million and the plant’sstart-up is planned for the second half of 2007.  Palmucho will take advantage of theecological flow that the Ralco plant, pursuant to Ralco’s Environmental ImpactAssessment, must release.

 

18

----

 

In August 2005, Endesa Eco presented to the MauleRegion’s National Environmental Commission its Environmental Impact Declarationfor the construction of the Ojos de Agua mini hydroelectric plant to be locatedsome 100 kilometers from the town of Talca, in the valley of the RiverCipreses, downstream from the La Invernada Lake.  This mini plant will have a capacity of 9 MW,and the investment cost is expected to be U.S.$ 15.5 million .

 

We are continually seeking attractive opportunities inthe electricity industry internationally, either in countries in which wepresently conduct operations or elsewhere in Latin America. In fact,Endesa Chile has begun on-site inspections and contacts with localcommunities and regional authorities for the potential development of new powerplants in Aysén, in southern Chile. These plants, involving a total installed capacity of 2,430 MW, wouldrequire an investment of around U.S.$ 2.0 billion.  See “Item 4. Information on the Company–B.Business Overview” below.

 

The table below sets forth the capital expendituresmade by our subsidiaries in 2005 and expected capital expenditures for theperiod 2006-2010:

 

**CAPITALEXPENDITURES OF ENDESA CHILE AND ITS SUBSIDIARIES**

 
| ** ** | ** ** | **(in millions of U.S.$) (1)** | ** ** |
|------------|------------|--------------------------------|------------|
| ** ** | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2005** | ** ** | **2006-2010** | ** ** |
| Chile      |       | 197.9                          |       | 119.9 |   | 46.8 |   | $ | 1,219.7 |   |
| Argentina  |       | 9.4                            |       | 22.3 |   | 29.7 |   | 131.2 |   |
| Brazil     |       | 0.8                            |       | 2.8 |   | 1.0 |   | — |   |
| Colombia   |       | 6.1                            |       | 6.7 |   | 9.2 |   | 92.7 |   |
| Peru       |       | 6.6                            |       | 10.4 |   | 21.6 |   | 75.2 |   |
| Total      |       | 220.8                          |       | 162.1 |   | 108.3 |   | $ | 1,518.8 |   |

 

----

(1)          Figures for 2003-2004 are in historicalU.S. dollars. Figures for 2005-2010 are expressed in U.S. dollars at theexchange rate as of December 31, 2005.

 

We have carried out some strategic investments,divestitures and other reorganizations in the last five years in order toconcentrate on core businesses, including the following:

 

•                  on March 27, 2003,Endesa Chile sold Canutillar, a 172 MW reservoir-based hydroelectricfacility, for U.S.$ 174 million, at the exchange rate as of the date ofthe transaction;

 

•                  on May 30, 2003,Endesa Chile sold its transmission lines in the Northern InterconnectedSystem (“SING”).  This transactionincluded the sale by Celta, a subsidiary of Endesa Chile, of 285kilometers of 220 kV line circuits for approximately U.S.$ 32 million, atthe exchange rate as of the date of the transaction, and a sale of 673kilometers of 220 kV line circuits for approximately U.S.$ 78 millionthrough GasAtacama Generación Limitada, in which Endesa Chile holds a 50%ownership interest.  In both cases, thetransaction included the transfer of the respective substations;

 

•                  on June 23, 2003,Endesa Chile closed the sale of its 60% ownership share of Infraestructura2000, which held highway concession assets to the Spanish company, OHLConcesiones, S.L., a subsidiary of the Spanish company Obrascón HuarteLain S.A., for a total amount of UF 2,305,507, approximatelyU.S.$ 55 million, at the exchange rate as of the date of the transaction;

 

•                  during 2003,Endesa Chile purchased 384,508 shares of Cachoeira Dourada through itsinvestment subsidiary, Lajas Inversora S.A., for a total of Ch$ 24.8million pesos, approximately U.S.$ 41,700 at the exchange rate as of December 31,2003, increasing its ownership of Cachoeira Dourada to 92.51% of itsoutstanding shares of common stock;

 

•                  on October 3, 2003,Endesa Chile purchased an additional 16 million Class A Shares and1.96 million Class B Shares of Endesa Costanera, for a total ofU.S.$ 4.5 million, at the exchange rate as of the date of

 

19

----

 

the transaction, thus increasing its ownership of Endesa Costanerato 64.3% of its outstanding shares of common stock;

 

•                  on December 17, 2004,Endesa Chile dissolved subsidiary Endesa Colombia, which had investmentsin Central Hidroeléctrica Betania S.A., leaving Endesa Chile andCompañía Electrica Conosur S.A. with a direct participation in Betania;

 

•                  on April 18, 2005,Endesa Chile and its subsidiary Endesa Inversiones Generales S.A.(ENIGESA), created a new subsidiary Endesa ECO S.A.  Endesa Chile has a direct participationof 99.99% and a 0.01% through its subsidiary ENIGESA (See “Item 4. Informationon the Company—C. Organizational Structure” for details on ENIGESA);

 

•                  on May 31, 2005,Endesa Chile’s Board of Directors approved the formation of a Brazilianholding company whose objectives are to simplify the shareholding structure byholding all Brazilian electricity assets under one new holding company,Endesa-Brasil S.A. (“Endesa Brasil”), and also to enhance access tothird-party financings (including the domestic capital markets), improvepositioning for potential growth opportunities, achieve greater stability forcash flows, as well as generate operating synergies.  On June 10, 2005 Endesa Brasil wasconstituted in Brazil.  As of October 1,2005, the total participation interest Endesa Chile held in CentraisElectrica Cachoeira Dourada S.A. (“CDSA”, 92.51%) and in Companhia deInterconexao Energética S.A (“CIEN”, 45.00%), in Compañía de Transmisión delMercosur S.A. (“CTM”, 45.00%) and in Transportadora de Energía delMercosur S.A. (“TESA” 45.00%) was transferred to this new entity, whichtranslates into a voting interest of 37.85% for Endesa Chile inEndesa Brasil as of December 31, 2005;

 

•                  on August 11, 2005,Endesa Chile and its subsidiary Enigesa Inversiones Generales S.A.acquired 99.999% and 0.001% respectively of the partnership rights in GlobeleqChile Inversiones Eléctricas Limitada (Globeleq Chile Limitada), a company thathas become a subsidiary of Endesa Chile under the new name of InversionesLo Venecia Limitada; this company is the indirect holder of 25.001% of theshare capital of Compañía Eléctrica San Isidro S.A. (“San Isidro”), also asubsidiary of Endesa Chile.  Thesellers were the companies Latin America Holding I, Ltd.  and Latin America Holding II, Ltd.,subsidiaries of the English company CDC Group PLC, and the total sale price wasU.S.$ 21,063,757.  Inversiones LoVenecia Limitada, apart from its 25.001% shareholding in Compañía Eléctrica SanIsidro S.A., has financial assets of around U.S.$ 6 million;

 

•                  on October 03, 2005,Endesa Chile’s Board of Directors approved the dissolution and liquidationof the investment society Lajas Inversoras S.A., which owned 99.61% of theBrazilian company Cachoeira Dourada S.A. The assets of this society were distributed between its shareholders inproportion to their participation in the society;

 

•                  on November 16, 2005,Gestora del Proyecto GNL S.A. (“GNL Project”), was constituted, a societyformed by Endesa Chile, jointly with ENAP, Colbún, Metrogas and AESGenerto develop the liquified natural gas project for Chile. Endesa Chile has a23.6% ownership of this new company;

 

•                  as of December 13,2005, Endesa Chile, through its Argentine subsidiaries, El Chocón andEndesa Costanera, participates in two new companies, “TermoeléctricaManuel Belgrano S.A.” and “Termoeléctrica Jose de San Martin S.A.”,with a 15.4% and a 5.5% share interest, respectively, in each new company (See “Item4. Information on the Company—B. Business Overview – Operations in Argentinafor details); and

 

•              as of January 26,2006, CESA (Capital de Energía S.A.), an investment vehicle for EndesaChile’s share in Emgesa has ceased to exist, simplifying Endesa Chile’s structure of organizations in Colombia.

 

***RecentDevelopments***

 

On September 5, 2005, Gas Natural SDG, S.A.(“Gas Natural”), a Spanish natural gas supplier, requested authorization fromthe Spanish Securities Market Commission (*Comisión Nacional delMercado de Valores*, or “*CNMV*”) totender for 100% of the share capital of ENDESA, S.A. (“Endesa-Spain”),Enersis’ parent company.  As

 

20

----

 

of the date of thisreport, the consideration offered to Endesa-Spain shareholders is € 7.34in cash and 0.569 newly-issued Gas Natural shares for each Endesa-Spainshare.  The offer is conditional upon GasNatural acquiring shares representing 75% of the share capital ofEndesa-Spain.  In addition, the offer isconditional on the modification by the Endesa-Spain general shareholders of anumber of Articles in Endesa-Spain’s By-Laws, including Article 32, whichsets forth a limitation in respect of the maximum number of votes capable ofbeing exercised by Endesa-Spain shareholders. On February 3, 2006, the Spanish Government’s *Consejo deMinistros*approved the potential economic concentration transactionarising from the tender offer, subject to certain conditions.

 

On February 21, 2006, E.ON, the Germanmultinational power and gas utility, announced a competing tender offer for100% of the share capital of Endesa-Spain at a price of € 27.50 per sharein cash.  The offer is conditional onhaving E.ON acquire at least 529,481,934 shares of Endesa-Spain, representing50.01% of Enersis’ parent company’s share capital and requiring Endesa-Spainshareholders to modify Articles 32, 37, 38, and 42 of Endesa-Spain’sBy-Laws.  If all conditions are met, andif all required governmental approvals are granted, E.ON’s press release statesthat it would expect the transaction to be completed by mid-year 2006.

 

At the time of this report, we cannot predict if oneof the tender offers above, possibly in some modified manner, will ultimatelybe successful, nor can we predict whether other potential parties will offercompeting tender offers for the control of our parent company.  Furthermore, we cannot forecast eventualcredit ratings for any company that may prove successful in a tender offer overEndesa-Spain.  We have outstanding creditfacilities with “change of control” provisions which could result in someacceleration rights on such indebtedness. See “Item 3. Key Information—D. Risk Factors”.

 

**B.**            BusinessOverview.

 

We are a publicly traded electric generation companywith operations in Chile, Argentina, Brazil, Colombia and Peru.  Our core business is electricitygeneration.  We also participate in theengineering services industry and have a highway concession.  The low proportion of non-generation revenuesdoes not justify the breakdown of revenues per activity.

 

Our consolidated installed capacity, as of December 31,2005, is 11,726 MW, with 67% hydroelectric capacity and 33% thermal electricgeneration capacity.  Total installedcapacity is defined as the maximum power capacity (measured in MW generationunits), under specific technical conditions and characteristics.

 

We own and operate twenty-two generation facilities inChile with an aggregate installed capacity, as of December 31, 2005, of4,477 MW.  We accounted for approximately37% of Chile’s total generation capacity as of December 31, 2005 measuredby the maximum capacity considered by CDEC-SIC in the calculation of firmcapacity.  Hydroelectric installed capacityin Chile represents 76% of Endesa Chile’s total installed capacity in Chile.

 

As of December 31, 2005, we also had interests intwenty-four generation facilities outside Chile with an aggregate installedcapacity of 7,249 MW compared to 7,856 MW in 2004.  On a consolidated basis, our total installedcapacity outside Chile decreased by 658 MW because we no longer consolidateCachoeira Dourada as of October 2005. The decrease was partially offset by other increased capacities: 19 MWfrom the La Junca plant in Colombia which started operations in January 2005,and the incorporation of two plants of 7 MW in Guavio, Colombia. Hydroelectricinstalled capacity outside Chile represents 62% of Endesa Chile’s totalinstalled capacity outside Chile.  Basedon 2005 figures, the Company’s installed generation capacity in Argentina,Colombia and Peru represents approximately 16%, 20% and 22% of total capacityin each country, respectively.

 

21

----

 

The following table sets out information relating toEndesa Chile’s electricity generation:

 

**ENDESACHILE’S CONSOLIDATED HYDRO/THERMAL GENERATION (GWh)(1)**

 
| ** **                   | ** ** | **Year ended December 31,** | ** ** |
|------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                   | ** ** | **(GWh)**                        | ** ** | **%** | ** ** | **(GWh)** | ** ** | **%** | ** ** | **(GWh)** | ** ** | **%** | ** ** |
| Hydroelectric Generation (2) |       | 35,035                           |       | 82 |   | 34,858 |   | 74 |   | 38,068 |   | 76 |   |
| Thermal Generation           |       | 7,591                            |       | 18 |   | 12,508 |   | 26 |   | 12,054 |   | 24 |   |
| Total Generation             |       | 42,626                           |       | 100 |   | 47,366 |   | 100 |   | 50,122 |   | 100 |   |

 

----

(1)          Generationminus power plant own consumption and technical losses.

 

(2)          CachoeiraDourada’s generation consolidated through September, 2005.

 

Our consolidated electricity production reached 50,122GWh in 2005, 5.8% higher than the 47,366 GWh produced in 2004.  Our total generation in 2003 was 42,626GWh.  It is common in the electricitygeneration industry to segment the business into hydroelectric andthermoelectric generation.  This is donebecause each method of generation has different variable costs associated withgenerating electricity.  Thermoelectricgeneration requires the purchase of fuel rather than the use of water fromreservoirs or rivers, thereby increasing the economic variable costs ofgeneration for the Company.

 

Our consolidated physical energy sales for 2005 were55,884 GWh, 4.6% higher than in 2004. When compared to our physical sales for 2003, figures for 2005 representa 10% increase, mainly because of higher physical sales in Chile and Argentina,as is illustrated in the following table:

 

**ENDESACHILE PHYSICAL DATA PER COUNTRY**

 
| ** **                           | ** ** | **As of December 31, each  year** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2003**                               | ** ** | **2004** | ** ** | **2005** | ** ** |
| Argentina                            |       |                                   |       |   |   |   |   |
| Number of  generating facilities (1) |       | 5                                      |       | 5 |   | 5 |   |
| Installed  capacity (MW) (2)         |       | 3,622.0                                |       | 3,623.0 |   | 3,623.0 |   |
| Energy  generated (GWh) (3)          |       | 7,996.5                                |       | 11,289.7 |   | 12,332.5 |   |
| Energy sales  (GWh)                  |       | 9,259.0                                |       | 11,603.3 |   | 12,578.8 |   |
| Brazil (4)                           |       |                                   |       |   |   |   |   |
| Number of  generating facilities (1) |       | 1                                      |       | 1 |   | — |   |
| Installed  capacity (MW) (2)         |       | 658.0                                  |       | 658.0 |   | — |   |
| Energy  generated (GWh) (3)          |       | 3,024.3                                |       | 3,262.2 |   | 2,644.8 |   |
| Energy sales  (GWh)                  |       | 3,770.0                                |       | 3,902.0 |   | 2,897.5 |   |
| Chile                                |       |                                   |       |   |   |   |   |
| Number of generating  facilities (1) |       | 21                                     |       | 22 |   | 22 |   |
| Installed  capacity (MW) (2)         |       | 3,763.0                                |       | 4,476.7 |   | 4,476.7 |   |
| Energy  generated (GWh) (3)          |       | 16,524.0                               |       | 16,797.0 |   | 18,763.8 |   |
| Energy sales  (GWh)                  |       | 18,681.0                               |       | 18,461.0 |   | 20,730.4 |   |
| Colombia                             |       |                                   |       |   |   |   |   |
| Number of  generating facilities (1) |       | 9                                      |       | 10 |   | 11 |   |
| Installed  capacity (MW) (2)         |       | 2,589.0                                |       | 2,608.6 |   | 2,657.2 |   |
| Energy  generated (GWh) (3)          |       | 10,793.9                               |       | 11,881.2 |   | 11,864.2 |   |
| Energy sales  (GWh)                  |       | 14,481.0                               |       | 15,148.8 |   | 15,077.5 |   |
| Peru                                 |       |                                   |       |   |   |   |   |
| Number of  generating facilities (1) |       | 8                                      |       | 8 |   | 8 |   |
| Installed  capacity (MW) (2)         |       | 967.0                                  |       | 966.5 |   | 968.5 |   |
| Energy  generated (GWh) (3)          |       | 4,287.0                                |       | 4,136.0 |   | 4,516.3 |   |

 

22

----

 
| ** **          | ** ** | **As of December 31, each  year** | ** ** |
|---------------------|------------|----------------------------------------|------------|
| ** **          | ** ** | **2003**                               | ** ** | **2004** | ** ** | **2005** | ** ** |
| Energy sales  (GWh) |       | 4,443.0                                |       | 4,327.6 |   | 4,599.9 |   |

 

----

| (1)    | For details on  generation facilities, see “Item 4. Information on the Company—D. Property  Plants and Equipment.”           |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                        |
| (2)    | Total installed  capacity defined as the maximum MW capacity of generation units, under  specific technical conditions and characteristics. |
|   |                                                                                                                                        |
| (3)    | Energy generated  defined as total generation minus own power plant consumption and technical  losses.                                      |
|   |                                                                                                                                        |
| (4)    | We consolidated  Cachoeira Dourada’s generation only through September 2005.                                                      |

 

We segment our sales to customers using two differentcategories.  First, we distinguishbetween regulated and unregulated customers. Regulated customers are subject to a set tariff established by thegovernment regulators in each country. We may enter into contracts with them only at the set tariff.  Unregulated customers may negotiate the priceof electricity freely with generators and enter into contracts, or they may buyelectricity in the pool market at the spot price.  The second criterion we use to segment ourcustomer sales is by contracted sales and non-contracted sales.  This method is useful because it provides auniform way for us to compare our customers from country to country.  The countries in which we operate havevarying classifications for what constitutes a regulated customer; in contrast,contracted sales are defined uniformly throughout.

 

The following table contains information regardingEndesa Chile’s consolidated sales of electricity by type of customer for eachof the periods indicated:

 

**ENDESACHILE CONSOLIDATED PHYSICAL SALES BY TYPE OF CUSTOMER (GWH)**

 
| ** **                    | ** ** | **Year ended December 31** | ** ** |
|-------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **Sales**                       | ** ** | **% of Sales  Volume** | ** ** | **Sales** | ** ** | **% of Sales  Volume** | ** ** | **Sales** | ** ** | **% of Sales  Volume** | ** ** |
| ** **                    | ** ** | **(GWh)**                       | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** |
| Regulated Customers           |       | 21,463                          |       | 42.4 |   | 21,623 |   | 40.5 |   | 21,206 |   | 37.9 |   |
| Non-Regulated Customers       |       | 11,309                          |       | 22.3 |   | 11,979 |   | 22.4 |   | 12,652 |   | 22.6 |   |
| Electricity Pool Market Sales |       | 17,862                          |       | 35.3 |   | 19,841 |   | 37.1 |   | 22,026 |   | 39.4 |   |
| Total  Electricity Sales      |       | 50,634                          |       | 100.0 |   | 53,443 |   | 100.0 |   | 55,884 |   | 100.0 |   |

 

In general, in the countries in which we operate, thepossibility of contracting electricity is related to the volume of electricitydemand.  Customers identified as smallvolume-regulated customers, such as residential customers, subject to governmentregulated electricity tariffs, cannot purchase energy directly from generators,but must purchase electricity from a distribution company.  These distribution companies, which purchaselarge amounts of electricity for small consumption residential customers,generally enter into contractual agreements with generators at a regulatedtariff price.  Customers identified aslarge volume industrial customers also enter into contractual agreements withenergy suppliers.  However, such largevolume industrial customers are non-regulated and are not subject to theregulated tariff price.  Instead, thesecustomers are allowed to negotiate the price of energy with generators based onthe characteristics of the service required. Finally, the market pool, where energy is normally sold at the spotprice is not formalized through contractual agreements.

 

The specific energy (measured in GWh) consumptionlimit for regulated and non-regulated customers is country-specific.  Likewise, regulatory frameworks often requirethat regulated distribution companies have contracts to support theircommitments to small customers and also often determine which customers canpurchase energy in electricity pool markets.

 

Under normal hydrological conditions, normal fuelconditions and relative political and economic stability, our regulated andnon-regulated customers formalize their commercial relationship by means of acontract.  The electricity pool marketsales are not governed by contracts, but instead comply with pool market operations.

 

23

----

 

The following table contains information regarding ourconsolidated physical sales of electricity per customer segment:

 
| ** **              | ** ** | **Year ended December 31** | ** ** |
|-------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **              | ** ** | **Sales**                       | ** ** | **% of Sales  Volume** | ** ** | **Sales** | ** ** | **% of Sales  Volume** | ** ** | **Sales** | ** ** | **% of Sales  Volume** | ** ** |
| ** **              | ** ** | **(GWh)**                       | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** |
| Contracted Sales        |       | 32,772                          |       | 64.7 |   | 33,603 |   | 62.9 |   | 33,858 |   | 60.6 |   |
| Non-Contracted Sales    |       | 17,862                          |       | 35.3 |   | 19,840 |   | 37.1 |   | 22,026 |   | 39.4 |   |
| Total Electricity Sales |       | 50,634                          |       | 100.0 |   | 53,443 |   | 100.0 |   | 55,884 |   | 100.0 |   |

 

Our accounting information systems allow theconsolidation of monetary sales per country, but do not currently allow theconsolidation of monetary sales per segment of customers according to price orcontract criteria.

 

In terms of expenses, the main variable costs involvedin the electricity generation business, in addition to the direct variable costof generating hydroelectric or thermal electricity, such as fuel costs, areenergy purchases and transportation costs. During periods of relatively low rainfall conditions, the amount of ourthermal generated electricity increases. This involves increasing not only the total cost of fuel, but also thecost of transporting that fuel to the thermal generation power plants, therebyleading to greater transportation costs. Under drought conditions, electricity that we have contractually agreedto provide may exceed the amount of electricity that we are able to generate,requiring us to purchase electricity in the pool market in order to satisfy ourcontractual commitments.  The cost ofthese pool market purchases may, under certain circumstances, exceed the priceat which we sell electricity under contracts, resulting in a loss.  We attempt to minimize the effect of poorhydrological conditions on our operations in any year primarily by limitingcontractual sales requirements to an amount not in excess of estimatedproduction in a “dry year.” In determining estimated production in a dry year,we take into account available statistical information concerning rainfall andwater flows, as well as the capacity of key reservoirs.  In addition to limiting contracted sales, wemay adopt other strategies such as installing temporary thermal capacity,negotiating lower consumption levels with its unregulated customers andnegotiating with other water users.

 

The following table contains information regarding ourelectricity production and purchases:

 
| ** **             | ** ** | **Year ended December 31** | ** ** |
|------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **             | ** ** | **Sales**                       | ** ** | **% of Sales  Volume** | ** ** | **Sales** | ** ** | **% of Sales  Volume** | ** ** | **Sales** | ** ** | **% of Sales  Volume** | ** ** |
| ** **             | ** ** | **(GWh)**                       | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** |
| Electricity Production |       | 42,626                          |       | 83.5 |   | 47,366 |   | 88.0 |   | 50,122 |   | 88.7 |   |
| Electricity Purchases  |       | 8,397                           |       | 16.5 |   | 6,474 |   | 12.0 |   | 6,396 |   | 11.3 |   |
| Total(1)               |       | 51,023                          |       | 100.0 |   | 53,840 |   | 100.0 |   | 56,517 |   | 100.0 |   |

 

----

(1)          Total energy production (GWh) pluspurchases differs from GWh sales due to technical transmission losses in Chileand Peru, as the production figure has already deducted power plant consumptionand technical losses in all generation units.

 

Our significant non-operating business in Chile, whichis based on the operations of unconsolidated related companies, is primarilyconducted through *GasAtacama S.A.*, orGasAtacama.  We have a 50% ownershipinterest in GasAtacama through which we participate in the gas transportationand thermal generation business in northern Chile.  We also participate in the gas transportationbusiness in Chile through our affiliated company, *Electrogas S.A.*(“Electrogas”), in which we have a 42.5% ownership interest.  Electrogas has a pipeline to the fifthChilean region and it supplies natural gas to the power plants San Isidro andNehuenco

 

We participate in an additional significant businessthrough our equity investment in *Companhia de InterconexãoEnergética S.A*, or CIEN, in Brazil, in which we held a direct 45%ownership share until September 30, 2005. As of the last quarter of 2005, our investment in CIEN was contributedto Endesa Brasil S.A. (“Endesa Brasil”), and our indirect equityshare in CIEN declined to 37.85%.  CIENis involved in electricity trading

 

24

----

 

in Brazil and also in theoperation of the transmission interconnection lines between Argentina andBrazil.  We also have a minority interestin electricity trading and transmission in Argentina through our 45% ownershipin *Comercializadora de Energía del Mercosur S.A.*,or CEMSA and*Compañía de Transmisión del Mercosur S.A.*,or CTM, the latter also having been contributed to Endesa Brasil as of September 30,2005.  See “Item 4. Information theCompany—C. Organizational Structure” for details on our related companies.

 

As of December 31, 2005, Endesa Chile hadconsolidated assets of Ch$ 4,874 million (U.S.$ 9.5 billion) comparedto Ch$ 5,318 million (U.S.$ 10.4 billion) as of December 31,2004.  Our consolidated operatingrevenues amounted to Ch$ 1,123 million (U.S.$ 2.2 billion) comparedto Ch$ 1,070 million or U.S.$ 2.1 billion as of December 31,2004.  Our 2005 net income amounted toCh$ 110.6 billion (U.S.$ 215.8 million) compared to net income ofCh$ 86.8 billion (U.S.$ 169.4 million) as of December 31,2004.  All U.S. dollar amounts weretranslated using the same observed Exchange Rate for December 31, 2005 ofCh$ 512.50 per U.S.$ 1.00.  See“Item 3.  Key Information—A. SelectedFinancial Data.”

 

**Operations in Chile**

 

Operating income from our business in Chilerepresented 49.8%, 45.3%, and 48.8% for years 2003, 2004 and 2005 of our totaloperating income.  Operating revenues andexpenses for the three years are shown in the following table:

 

**TOTALOPERATING INCOME FROM OPERATIONS IN CHILE**

 
| ** **          | ** ** | **Year ended December 31,**                                     | ** ** |
|---------------------|------------|----------------------------------------------------------------------|------------|
| ** **          | ** ** | **2003**                                                             | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **          | ** ** | **(in millions of constant Ch$ as  of December 31, 2005)** | ** ** |
| Operating  revenues |       | 486,220                                                              |       | 484,416 |   | 548,028 |   |
| Operating expenses  |       | 302,922                                                              |       | 309,688 |   | 340,294 |   |
| Operating income    |       | 164,870                                                              |       | 155,108 |   | 189,008 |   |

 

----

For details on thevariations of yearly monetary figures, please see “Item 5.  Operating and Financial Review and Prospects.”

 

We, through our own assets as well as through oursubsidiaries *Empresa Eléctrica Pehuenche S.A.*,or Pehuenche, *Empresa Eléctrica Pangue S.A.*,or Pangue, *Compañía Eléctrica San Isidro S.A.*,or San Isidro, and *Compañía EléctricaTarapacá S.A.*, or Celta, own and operate a total of twenty-twogeneration plants in Chile.  Fourteen ofthese plants are hydroelectric plants, with a total installed capacity ofapproximately 3,416 MW.  This represents76% of our total installed capacity in Chile. The remaining eight plants are gas-, coal- or oil-fired thermal plantswith a total installed capacity of approximately 1,061 MW.  Our power plants are connected to the country’smajor interconnected electricity systems, *Sistema InterconectadoCentral, or the SIC, and Sistema Interconectado del Norte Grande*, orthe SING, which together supply energy to over 98% of Chile’s population.

 

The following table sets forth the installedgeneration capacity for each of the Company’s Chilean subsidiaries:

 

**INSTALLEDCAPACITY PER SUBSIDIARY IN CHILE (MW)**

 
| ** ** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Endesa     |       | 2,040    |       | 2,754    |       | 2,754    |       |
| Pehuenche  |       | 695      |       | 695      |       | 695      |       |
| Pangue     |       | 467      |       | 467      |       | 467      |       |
| San Isidro |       | 379      |       | 379      |       | 379      |       |
| Celta      |       | 182      |       | 182      |       | 182      |       |
| Total      |       | 3,763    |       | 4,477    |       | 4,477    |       |

 

25

----

 

 

Our total electricity generation in Chile (both theSIC and the SING)  reached 18,764 GWh in2005, 11.7 % higher than in 2004, and accounted for approximately 37% of totalelectricity production in Chile.  TheCompany’s generation market share in Chile for 2004 and 2003 were 35% and 37%,respectively.

 

The following table sets forth the electricitygeneration for each of our Chilean subsidiaries:

 

**ELECTRICITYGENERATION IN CHILE (GWh)**

 
| ** ** | ** ** | **Year ended December 31,** | ** ** |
|------------|------------|--------------------------------------------|------------|
| ** ** | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| Endesa     |       | 8,466                                      |       | 8,633 |   | 10,903 |   |
| Pehuenche  |       | 3,679                                      |       | 3,464 |   | 4,060 |   |
| Pangue     |       | 1,681                                      |       | 1,671 |   | 2,241 |   |
| San Isidro |       | 2,264                                      |       | 2,622 |   | 1,178 |   |
| Celta      |       | 434                                        |       | 407 |   | 383 |   |
| Total      |       | 16,524                                     |       | 16,797 |   | 18,764 |   |

 

Low-cost hydroelectric generation accounted for 84% ofour total electricity generation in 2005, as shown in the following table:

 

**ENDESA CHILEHYDRO/THERMAL GENERATION IN CHILE (GWh)**

 
| ** **               | ** ** | **Year ended December 31** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **               | ** ** | **Generation.**                           | ** ** | **%** | ** ** | **Generation.** | ** ** | **%** | ** ** | **Generation.** | ** ** | **%** | ** ** |
| ** **               | ** ** | **(GWh)**                                 | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** |
| Hydroelectric Generation |       | 13,085                                    |       | 79.2 |   | 12,462 |   | 74.2 |   | 15,762 |   | 84.0 |   |
| Thermal Generation       |       | 3,439                                     |       | 20.8 |   | 4,335 |   | 25.8 |   | 3,003 |   | 16.0 |   |
| Total Generation         |       | 16,524                                    |       | 100.0 |   | 16,797 |   | 100.0 |   | 18,764 |   | 100.0 |   |

 

Our thermal electric generation facilities are eithergas-, coal- or oil-fired.  For ournatural gas and transportation requirements, we enter into long-term gascontracts that establish maximum amounts and price of supply and long-term gastransportation agreements with the pipeline companies, Gas Andes and *Electrogas*.  We have a42.5% interest in Electrogas.  We obtainour coal and fuel oil requirements through competitive bidding using majordomestic and international suppliers.

 

During the second and third quarter of 2005, SanIsidro and Taltal were affected by natural gas restrictions from Argentina.

 

The low price imposed by Argentine regulators onnatural gas in Argentina affected production and investment in natural gasfields, which has in turn impacted the availability of this fuel in Chile,forcing San Isidro and Taltal and other electricity generation companies inChile to use more expensive fuel oil.

 

Our thermal plants San Isidro and Taltal, located inChile’s central region, use natural gas for thermal generation and have gascontracts with Argentine suppliers.  TheArgentine government adopted a resolution allowing governmental authorities topartially suspend natural gas exports and giving the President of Argentina thepower to temporarily suspend the long-term supply contracts of Argentineexporters.

 

This condition increased the production costs for bothSan Isidro and Taltal, and led to the signing of swap contracts between SanIsidro and Endesa Chile’s subsidiary in Argentina, Endesa Costanera.  Considering the greater efficiency ofgenerating in San Isidro’s power plant with natural gas rather than liquidfuel, San Isidro entered into an energy swap agreement in 2005 withEndesa Costanera.  This agreementallowed San Isidro to generate with natural gas at the cost of liquid fuel inArgentina.  In January 2006, bothcompanies reached a new agreement in order to continue this swap operationduring 2006.

 

26

----

 

In addition, in 2005, Taltal was affected by thereduction in the readiness of natural gas to 50% of its daily required volumedue to the absence of a export permission approval by the Argentineauthority.  During the first quarter of2005, in order to reduce the impact of lower natural gas supply, Taltalcompleted a project that enabled one of its two generation units to operatewith alternative liquid fuel.

 

Physical energy sales in Chile reached 18,681 GWh in2003, 18,461 GWh in 2004 and 20,730 GWh in 2005 which represent a 44%, 40% and44% market share, respectively.  Ourphysical generation in Chile has increased since 2003 and the percentage of theenergy purchases to meet contractual obligations to third parties has declinedfrom 13% in 2003 to 11% in 2005, as a consequence of our commercial strategy ofreducing contracted sales.  This commercialstrategy is strongly driven by our decision to reduce hydrological exposure aswell as by government regulations implemented in 2000 and 2001.  See “Item 4. Information on the Company–B.Business Overview–Electricity Generation in Chile–Industry Structure andRegulatory Framework.” We attempt to minimize the effect of poor hydrologicalconditions on our operations, in any given year, primarily by limitingcontractual commitments to an amount below the estimated production in a dryyear.  Government regulations have hadthe direct effect of increasing contract failure costs, which is the cost thatwe pay when we are not able to satisfy our contractual commitments, and theindirect effect of discouraging investment in generation assets.  Given the effects of the governmentregulations, energy supply has not increased at the same rate as energy demand,increasing the spot price in the electricity pool market and making it arelatively more attractive commercial alternative.

 

The following table sets forth our electricitypurchases and production in Chile:

 

**PHYSICALPRODUCTION AND PURCHASES IN CHILE (GWh)**

 
| ** **             | ** ** | **Year ended December 31** | ** ** |
|------------------------|------------|-------------------------------------------|------------|
| ** **             | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **             | ** ** | ** **                                | ** ** | **%  of Volume** | ** ** | ** ** | ** ** | **%  of Volume** | ** ** | ** ** | ** ** | **%  of Volume** | ** ** |
| Electricity Production |       | 16,524                                    |       | 87.3 |   | 16,797 |   | 89.8 |   | 18,764 |   | 89.2 |   |
| Electricity Purchases  |       | 2,409                                     |       | 12.7 |   | 1,914 |   | 10.2 |   | 2,268 |   | 10.8 |   |
| Total(1)               |       | 18,933                                    |       | 100.0 |   | 18,711 |   | 100.0 |   | 21,032 |   | 100.0 |   |

 

----

(1)          TotalGWh production plus purchases differs from GWh sales due to transmissionlosses, as power plant consumption and technical losses have already beendeducted.

 

We and our Chilean generation subsidiaries supplyelectricity to the major regulated electricity distribution companies, largeunregulated industrial firms (primarily in the mining, pulp and steel sectors)and the market pool.  Commercialrelationships with customers are normally governed by formal contracts.  Supply contracts with distribution companiesmust be adjudicated in a bidding process, have a price fixed by governmentalauthorities, are generally standardized and have an average term of tenyears.  Supply contracts with unregulatedcustomers (large industrial customers) are specific to the needs of each clientand all the conditions are agreed upon between both parties and reflectcompetitive market conditions.

 

In 2003, 2004 and 2005, Endesa Chile had 60, 56 and 53customers in Chile respectively, including the main distribution companies ofthe SIC and the major unregulated industrial customers.  From 2003 to 2005, sales to unregulated customershave declined from 31% in 2003 to 26% in 2004, and to 23% of our total energysales in 2005.

 

The following table sets forth information regardingour sales of electricity in Chile by type of customer:

 

27

----

 

**ENDESA CHILEPHYSICAL SALES PER CUSTOMER PRICE SEGMENTIN CHILE (GWh)**

 
| ** **                    | ** ** | **Year ended December 31** | ** ** |
|-------------------------------|------------|-------------------------------------------|------------|
| ** **                    | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **Sales**                                 | ** ** | **% of Sales  Volume** | ** ** | **Sales** | ** ** | **% of Sales  Volume** | ** ** | **Sales** | ** ** | **% of Sales  Volume** | ** ** |
| ** **                    | ** ** | **(GWh)**                                 | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** |
| Regulated Customers           |       | 9,994                                     |       | 53.5 |   | 10,387 |   | 56.3 |   | 10,575 |   | 51.0 |   |
| Non-Regulated Customers       |       | 5,767                                     |       | 30.9 |   | 4,884 |   | 26.5 |   | 4,797 |   | 23.1 |   |
| Electricity Pool Market Sales |       | 2,920                                     |       | 15.6 |   | 3,192 |   | 17.3 |   | 5,358 |   | 25.8 |   |
| Total electricity sales       |       | 18,681                                    |       | 100.0 |   | 18,462 |   | 100 |   | 20,731 |   | 100.0 |   |

 

Our most significant supply contracts with regulatedcustomers are with Chilectra S.A. (“Chilectra”) and *CompañíaGeneral de Electricidad S.A.*(“CGE”), the two largestdistribution companies in Chile.  Ourcontract with Chilectra expires in 2010 and our contract with CGE in 2009.  Upon expiration of each contract, a newbidding process will be conducted as required by regulation.

 

Customarily, our contracts with unregulated customersfor the sale of electricity in Chile are long-term, generally ranging from fiveto fifteen years.  Such contracts arenormally extended automatically at the end of the applicable term unlessterminated by either party upon prior notice. Such contracts generally provide that the purchase price be resetperiodically following the market price and some of them include a priceadjustment mechanism in the case of high marginal costs, which also reduces thehydrological risk.  Contracts withunregulated customers may also include specifications as to backup power sourcesand equipment, which may be provided at special rates, as well as the provisionof technical assistance to the customer. We have not experienced any supply interruptions under our contracts.  However, we did negotiate short-termarrangements with certain customers to reduce our supply to them due to theeffects of the drought during 1999.  Incase of *force majeure*, as contractually definedwith non-regulated customers, we are also allowed to refuse purchases and notrequired to supply electricity.  Contractswith unregulated customers generally do not impose any limitations on ourability to resell output not purchased under those contracts.  Disputes are typically subject to bindingarbitration between the parties, subject to limited exceptions.

 

The following table sets forth our sales by volume toour five largest distribution and unregulated customers in Chile for each ofthe periods indicated:

 

**MAIN CUSTOMERS INCHILE (GWh)**

 
| ** **                                          | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                          | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **Sales**                                 | ** ** | **% of  Sales** | ** ** | **Sales** | ** ** | **% of  Sales** | ** ** | **Sales** | ** ** | **% of  Sales** | ** ** |
| ** **                                          | ** ** | **(GWh)**                                 | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** |
| Distribution companies:                             |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Chilectra                                           |       | 4,699                                     |       | 25.2 |   | 4,747 |   | 25.7 |   | 4,231 |   | 20.4 |   |
| CGE                                                 |       | 3,628                                     |       | 19.4 |   | 3,877 |   | 21.0 |   | 4,154 |   | 20.0 |   |
| Saesa (1)                                           |       | 314                                       |       | 1.7 |   | 332 |   | 1.8 |   | 540 |   | 2.6 |   |
| Empresa Eléctrica de la Frontera S.A.     |       | 557                                       |       | 3 |   | 611 |   | 3.3 |   | 665 |   | 3.2 |   |
| Empresa Eléctrica de Atacama S.A.         |       | 536                                       |       | 2.9 |   | 580 |   | 3.1 |   | 643 |   | 3.1 |   |
| Total sales to five largest distribution  companies |       | 9,734                                     |       | 52.1 |   | 10,147 |   | 55.0 |   | 10,233 |   | 49.4 |   |

 

28

----

 

**Unregulatedcustomers:**

 
| ** **                                          | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                          | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **Sales**                                 | ** ** | **% of  Sales** | ** ** | **Sales** | ** ** | **% of  Sales** | ** ** | **Sales** | ** ** | **% of  Sales** | ** ** |
| ** **                                          | ** ** | **(GWh)**                                 | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** |
| Codelco (2)                                         |       | 728                                       |       | 3.9 |   | 711 |   | 3.9 |   | 536 |   | 2.6 |   |
| Inforsa (3)                                         |       | 676                                       |       | 3.6 |   | 779 |   | 4.2 |   | 794 |   | 3.8 |   |
| Cía. Minera Los Pelambres                      |       | 648                                       |       | 3.5 |   | 672 |   | 3.6 |   | 701 |   | 3.4 |   |
| Cía. Minera Collahuasi                         |       | 730                                       |       | 4.9 |   | 801 |   | 4.3 |   | 813 |   | 3.9 |   |
| Cía. Acero del Pacífico – Huachipato |       | 522                                       |       | 3.9 |   | 557 |   | 3.0 |   | 528 |   | 2.5 |   |
| Total sales to five largest unregulated  customers  |       | 3,304                                     |       | 17.7 |   | 3,521 |   | 19.1 |   | 3,372 |   | 16.3 |   |

 

----

(1)          We do not have a contract with SociedadAustral de Electricidad S.A. (“Saesa”). Sales respond to a government resolution (RM88) that forces the generatorsof the CDEC-SIC system to supply distribution companies without contracts.

 

(2)          In 2004 and 2005, we provided energy toboth Codelco, División El Teniente, and Codelco, División Salvador.  Codelco is a state-owned mining company andone of the largest copper producers in the world.

 

(3)          Industrias Forestales S.A. (“Inforsa”)is part of the CMPC Group.  Since January1, 2004 the contract with CMPC merges the total contracts with CMPC.

 

We compete in the SIC primarily with two otherelectricity generation companies, *AESGener S.A.*(“AESGener”) and *Colbún S.A.* (“Colbún”).  According to the maximum power considered byCDEC-SIC in the calculation of “firm power” in 2005, AESGener and subsidiariesin the SIC had an installed capacity of 1,467 MW, of which 80% was thermalelectric, and Colbún had an installed capacity of 1,819 MW, of which 59% wasthermal electric.  In addition to thesetwo large competitors, there are a number of smaller entities that generateelectricity in the SIC.  Our maincompetitors in the SING are *Electroandina, EmpresaEléctrica del Norte Grande S.A.* (“Edelnor”), AESGener and *Norgener S.A.*, which have 992, 719, 643 and 277 MW ofinstalled capacity respectively, larger than our direct participation in theSING, through our 182 MW Tarapacá thermal plant, owned by our subsidiary Celta,and our indirect participation through our unconsolidated company, GasAtacama,whose power plant has 781 MW of installed capacity.  See “Item 4. Information on the Company–C.Organizational Structure” for details on related companies.

 

Electricity generation companies compete largely onthe basis of technical experience and reliability and, in the case ofunregulated customers, on price.  Inaddition, as 76% of our installed capacity derives from hydroelectric powerplants, we have lower production costs than companies generating electricity inthe SIC from thermal plants.  Duringperiods of extended droughts, however, we may be forced to buy more expensiveelectricity from thermoelectric generators at spot prices in order to satisfyour contractual obligations.  Our mainsources of non-operating income are (i) our GasAtacama business, which has theability to transport up to 8.5 million cubic meters of gas daily and has a gas-firedcombined cycle plant with a total installed capacity of approximately 781 MW inMejillones, and (ii) our 42.5% ownership interest in Electrogas, which producestransportation income derived from the pipeline supplying San Isidro andNehuenco combined-cycle plants at Quillota. See “–Organizational Structure” for details on related companies.

 

**ElectricityGeneration in Chile—Industry Structure and Regulatory Framework**

 

The electricity industry in Chile is divided intothree sectors: generation, transmission and distribution.  The generation sector consists of companiesthat generate electricity from hydroelectric and thermal productionsources.  Generators sell theirproduction to distribution companies, generation companies, and other largecustomers that are permitted to purchase directly from generators because ofthe large amounts of electricity they purchase. The transmission sector consists of companies that transmit at highvoltage the electricity produced by generation companies.  The third sector consists of distributioncompanies that purchase electricity from generation companies to sell to theirregulated or unregulated customers.

 

The electricity sector in Chile is regulated pursuantto Law DFL No. 1, which was first enacted in 1982, and the regulations underDecree No. 327 of 1998, as amended, collectively known as the ChileanElectricity Act.  Under

 

29

----

 

the Chilean Electricity Act,the SEF and the Ministry of Economy acting through the CNE supervise thegeneration, transmission and distribution of electricity.  The Ministry of Economy grants concessions togeneration companies for hydroelectric facilities, and to transmission anddistribution companies for networks.  TheCNE, through the application of certain tariff formulas set forth in theChilean Electricity Act, calculates maximum prices for electricity sales toregulated end-users.

 

Chile’s electricity industry is organized into fourseparate interconnected electricity systems which facilitate the coordinationof generation, transmission and distribution activities within a givengeographic area: *Sistema Interconectado Central*(the“SIC”), *Sistema Interconectado del Norte Grande*(the “SING”), and two minor isolated systems that provide electricity in remoteareas, *Aysén*and*Magallanes*.

 

The operation of electricity generation companies ineach of the two major interconnected electricity systems in Chile, the SIC andthe SING, is coordinated by autonomous generating industry groups, known as the*Centro de Despacho Económico de Carga* (“CDEC”).  The SIC and the SING are intended to beefficient markets for the sale of electricity in which the lowest marginal costproducer is used to satisfy demand.  As aresult, at any specific level of demand, the appropriate supply will be providedat the lowest possible cost of production available in the system.  In addition, certain major industrialcompanies own and operate generation systems to meet their own demand.

 

The Chilean regulatory system requires thatelectricity generated by the producers with lower marginal costs be dispatchedbefore that of producers with higher marginal costs, in every electricsubsystem in the country.  Therefore, inthe SIC, electricity generated in our hydroelectric plants, which generallyhave lower marginal costs, is generally dispatched before the electricitygenerated in facilities that are dependent on thermal electric generation.  However, during unfavorable hydrologicalconditions when the marginal cost of electricity is higher due to the increaseduse of thermal electric facilities, electricity generated in these thermalfacilities may be dispatched before electricity generated by hydroelectricfacilities because the price/value of the water in reservoirs is relativelyhigher due to drought weather conditions. There are no significant hydroelectric generating facilities in theSING, but central dispatch of generation follows the same least marginal costrule.

 

As of December 31, 2005, we had a total of twenty-twogeneration facilities in Chile.  Twenty ofthe generation facilities (14 hydro plants and 6 thermal plants) owned andoperated by us in Chile were connected to the SIC, with the remaininggeneration facilities located in the SING.

 

The SIC, the largest of the systems, extends 2,400 kmfrom Taltal in the north to Quellón on the southern island of Chiloé. Installedcapacity in December 2005 was 8,538 MW, 58% of which is hydroelectric and 42%thermal. Peak demand on the SIC in 2005 was 5,768 MW and annual physical saleswere 35,901 GWh. Electricity sales to the SIC grew by 3.8 % from 2004 to 2005.The SIC covers the area where over 70% of the Chilean demand for electricity islocated.

 

We, both directly and through our subsidiariesPehuenche, Pangue and San Isidro, are the principal operator in the SIC, with50% of the total installed capacity and 55% of the physical energy sales ofthis system in 2005.

 

The SING covers the northern territory of the country,from Arica to Coloso, a distance of approximately 700 km.  The SING had an installed capacity as ofDecember 2005 of 3,596 MW, 99% of which is thermal.  Hourly peak gross generation in the SING in2005 was 1,631 MW and annual physical sales were 12,658 GWh.  Consumption grew by 2.7 % during 2005compared to 2004.  The facilities in theSING provide electricity to the northern mining region of Chile.

 

Our subsidiary Celta has a two-turbine 182 MW thermalpower plant connected to the SING, which represents 5% of the total capacity ofthe SING.  Through our unconsolidatedcompany, GasAtacama, we have an additional 781 MW participation in the SING,translating into a total 26.8% share of the SING’s total installed capacity in2005.  The following table sets outinformation relating to Endesa Chile’s electricity generation capacity inChile:

 

30

----

 

**POWER PLANTS INCHILE (MW)(1)**

 
| ** **                       | ** ** | **Type (2)**                            | ** ** | **System** | ** ** | **Installed Capacity** | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|------------|------------|-----------------------------|------------|
| ** **                       | ** ** | ** **                                   | ** ** | ** ** | ** ** | **(MW)**                    | ** ** |
| **Hydroelectric**                | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** **                  | ** ** |
| Rapel                            |       | Reservoir                                    |       | SIC        |       | 377                         |       |
| Ralco                            |       | Reservoir                                    |       | SIC        |       | 690                         |       |
| Cipreses                         |       | Reservoir                                    |       | SIC        |       | 106                         |       |
| El Toro                          |       | Reservoir                                    |       | SIC        |       | 450                         |       |
| Pehuenche                        |       | Reservoir                                    |       | SIC        |       | 566                         |       |
| Pangue                           |       | Reservoir                                    |       | SIC        |       | 467                         |       |
| Los Molles                       |       | Pass Through                                 |       | SIC        |       | 18                          |       |
| Sauzal                           |       | Pass Through                                 |       | SIC        |       | 77                          |       |
| Sauzalito                        |       | Pass Through                                 |       | SIC        |       | 12                          |       |
| Isla                             |       | Pass Through                                 |       | SIC        |       | 68                          |       |
| Antuco                           |       | Pass Through                                 |       | SIC        |       | 320                         |       |
| Abanico                          |       | Pass Through                                 |       | SIC        |       | 136                         |       |
| Curillinque                      |       | Pass Through                                 |       | SIC        |       | 89                          |       |
| Loma Alta                        |       | Pass Through                                 |       | SIC        |       | 40                          |       |
| **Total  Hydroelectric Thermal** |       |                                         |       |       |       | 3,416                       |       |
| Huasco TV                        |       | Steam  Turbine/Coal                          |       | SIC        |       | 16                          |       |
| Bocamina                         |       | Steam  Turbine/Coal                          |       | SIC        |       | 128                         |       |
| Tarapacá TG                 |       | Steam  Turbine                               |       | SING       |       | 24                          |       |
| Tarapacá  carbón       |       | Coal                                         |       | SING       |       | 158                         |       |
| Diego de  Almagro                |       | Gas  Turbine/Diesel Oil                      |       | SIC        |       | 47                          |       |
| Huasco TG                        |       | Gas  Turbine/IFO 180 Oil                     |       | SIC        |       | 64                          |       |
| San Isidro                       |       | Combined  Cycle/Natural Gas & Diesel Oil |       | SIC        |       | 379                         |       |
| Taltal                           |       | Gas  Turbine/Natural Gas                     |       | SIC        |       | 245                         |       |
| **Total  Thermal**               |       |                                         |       |       |       | 1,061                       |       |
| **Total  Capacity**              |       |                                         |       |       |       | 4,477                       |       |

 

----

(1)          Totalinstalled capacity defined as the maximum capacity (measured in MW generationunits), under specific technical conditions and characteristics.

 

(2)          Reservoirand pass-through refer to a hydroelectric plant that uses a dam or a river,respectively, to move the turbines which generate electricity.

 

Steam Turbine refers to the technology of a thermalpower plant that uses natural gas, coal, diesel or fuel oil to produce steam,which moves the turbines to generate the electricity.

 

Gas Turbine (TG) or open cycle refers to thetechnology of a thermal power plant that uses diesel oil, fuel oil, natural gasor other fuels to produce gas that moves the turbines to generate theelectricity.

 

Combined Cycle refers to the technology of a thermalpower plant that uses either natural gas, diesel oil or fuel oil to generategas that moves the turbines to generate electricity and then recovers the gasthat escapes from that process to generate steam to move another turbine.

 

***Chilean Electricity Act***

*** ***

*General*.  The goal of the Chilean Electricity Act is toprovide a simplified regulatory scheme and tariff-setting process which limitsthe discretionary role of the government through the establishment of objectivecriteria for setting prices.  Theexpected result is an economically efficient allocation of resources to andwithin the electricity sector.  Theregulatory system is designed to provide a competitive rate of return oninvestments in order to encourage private investment, while ensuring theavailability of electricity to all who request it.  We are subject to regulation of our pricesand other aspects of our business in Chile under the Chilean Electricity Act.  Three government entities have primaryresponsibility for the implementation and enforcement of the ChileanElectricity Act.  The CNE calculatesretail tariffs and wholesale, or node prices, which require the final approvalof the

 

31

----

 

Ministry of Economy, andprepares the indicative plan, a 10-year guide for the expansion strategy of theelectricity system that must be consistent with the calculated prices.  The SEF sets and enforces the technicalstandards of the system.  In addition,the Ministry of Economy grants final approval of tariffs and node prices set bythe CNE and regulates the granting of concessions to electricity generation,transmission and distribution companies.

 

Pursuant to the Chilean Electricity Act, companiesengaged in the generation of electricity in Chile must coordinate theiroperations through the CDECs to minimize the operating costs of the electricitynetwork and monitor the quality of service granted by the generation andtransmission companies.  Generationcompanies meet their contractual sales requirements by dispatching electricity,whether produced by them or purchased from other generators in the poolmarket.  The principal purpose of a CDECin operating the dispatch system is to ensure that only the most efficientlyproduced electricity is dispatched to customers.  However, the CDEC also seeks to ensure thatevery generation company has enough installed capacity and can produce enoughelectricity to meet the demand of its customers.  Because our production in the SIC isprimarily hydroelectric, and therefore our marginal cost of production isgenerally the lowest in that interconnected system, our electricity productionin the SIC is generally dispatched under normal hydrological conditions.  Generation companies balance theircontractual obligations with their dispatch by buying or selling electricity atthe spot price which is set hourly by the CDEC, based on the marginal cost ofproduction of the next kWh to be dispatched. This is known as the spot marginal cost.

 

*Sales by Generation Companies*.  Sales may be made pursuant to short- orlong-term contracts or, in the case of sales to other generation companies, ona spot basis.  Generation companies mayalso engage in contracted sales among each other at negotiated prices.  Generation companies are free to determinewhether and with whom to contract, the duration of contracts and the amount ofelectricity to be sold.

 

*Sales to Distribution Companiesand Certain Regulated Customers*.  Under the Chilean Electricity Act and itsregulations, sales to distribution companies for resale to regulated customersmust be made at the node prices then in effect at the relevant locations (“nodes”)on the interconnected system through which such electricity is supplied.  Regulated customers are those with maximumconsumption capacity equal to or less than 2 MW; however, after March 2006consumers with maximum consumption capacity between 0.5 and 2 MW can choosewhether to be regulated or unregulated customers (as defined the Short Law I –see below).  Distribution companies paytwo node prices: node prices for capacity and node prices for energyconsumption.  Node prices for capacityare determined by the marginal cost of increasing the existing capacity of theelectricity system with the least expensive remaining generating facility.  Node prices for energy consumption arecalculated based on the projected short-term marginal cost of satisfying thedemand for energy at a given point in the interconnected system, during thenext 48 months in the SIC and during the next 24 months in the SING.  In order to determine the marginal cost inthe SIC, a model is used that takes into account the principal variables in thecost of energy at each substation in the interconnected system over a 10-yearperiod.  This model includes thefollowing factors: projected growth in demand; reservoir levels (which areimportant in determining the availability and price of hydroelectricity); fuelcosts for thermal electric generation facilities; planned maintenance schedulesand other factors that would affect the availability of existing generationcapacity; and scheduled additions to generation capacity during the 10-yearIndicative Electricity Development Plan. The same general principles are used to determine marginal cost in the SING.

 

Node prices for capacity and energy consumption areestablished every six months, in April and October, by a decree issued by theMinistry of Economy.  Although nodeprices are quoted in Chilean pesos, the variables used to determine node pricesare mainly computed in U.S. dollars. These node prices then become effective in May and November.  Node prices are adjusted during a six-monthperiod only if changes in the underlying variables in the model used to projecta node price then in effect would result in a variation in excess of 10%, withrespect to the initially calculated price. Distribution companies are required to pay generation companies for eachmonth’s electricity purchases on the 21st day of the following month, at theapplicable node prices in effect at the time.

 

The Chilean Electricity Act provides that if ageneration company sells directly to a regulated customer, outside theconcession area of a distribution company, then the generation company mustapply the same price as the distribution company would be required to apply.

 

*Firm Capacity*.  Firm Capacity is the total probable capacityof all generating units in the interconnected system, calculated usinghistorical data, statistical analysis and certain assumptions regardinghydrology.  Each CDEC compares FirmCapacity to the maximum peak demand for capacity at peak hours on thesystem.  The

 

32

----

 

amount by which the system-wideprobable capacity exceeds the maximum demand at peak hours is prorated for eachgenerating unit in the system.  Installedcapacity of each unit is reduced by the resulting *pro rata*amount to determine “Allocated Firm Capacity.” If the Allocated Firm Capacityof any generation company exceeds its peak hour contracted commitments tocustomers, such company will be paid for its excess Allocated Firm Capacity bygeneration companies with peak hour commitments to customers in excess of theirAllocated Firm Capacity, based on the prevailing node price for capacity.

 

A generation company may be required to purchase orsell energy or capacity in the electricity pool market at any time dependingupon its contractual requirements in relation to the amount of electricity tobe dispatched by such company.  Purchasesand sales made in the electricity pool market are transacted at the spotmarginal cost of the interconnected system in which the companies are located,which is the marginal cost of the next kWh to be dispatched.  Generation companies making sales in theelectricity pool market are paid for each month’s sales on the twenty-secondday of the following month at the spot marginal cost in effect at the time ofsale.

 

*Sales to Unregulated Customers*.  The electricity law distinguishes betweenregulated and unregulated prices for electricity supply.  Electricity supply prices are unregulatedfor:

 

(1)          final customers with aconnected capacity equal to or greater than 2000 kW and consumers with aconnected capacity between 500 and 2000 kW who have chosen to beunregulated customers (as defined in the Short Law I–see below);

 

(2)          temporary customers; and

 

(3)          customers with specialquality requirements.

 

Customers not subject to regulated prices, commonlyknown as unregulated customers, may negotiate prices freely with distributionand/or generation companies.  All othercustomers are subject to the maximum prices established by the tariffs.

 

*Transmission*.  To the extent that a company’s transmissionassets were built pursuant to concessions granted by the Chilean government,the Chilean Electricity Act requires such company to operate the coveredtransmission system on an “open access” basis in which users may obtain accessto the system by contributing towards the cost of operating, maintaining and,if necessary, expanding the system. Transmission companies recover their investment in transmission assetsthrough tolls, or “wheeling rates,” which are charged to generation companies,and also partially financed by the final customer.  The toll is calculated according to a formulapursuant to which the owner of the transmission lines is reimbursed for itsinvestment and operating costs relating to the transmission lines used.  Disputes relating to transmission matters aresubmitted to an expert panel in accordance with the Chilean Electricity Act.

 

*Distribution Tariff to FinalCustomers*.  The tariffcharged by distribution companies to their final customers is determined by thesum of the purchase cost incurred by the distribution company (the node pricesfor capacity and energy consumption at the point of purchase from thegeneration company), a sub-transmission surcharge, a factor for distributionlosses of capacity and energy and the value added by the distribution network(the “VAD”).  The price for bothgeneration and distribution capacity sold to customers includes an “overlapfactor” to reflect the overlap between peak capacity demand for the customerand for the system as a whole.  Thesub-transmission surcharge reflects the cost of transmitting and transformingelectricity from a node on the interconnected system to a substation at thedistribution level.  The VAD includes anallowed return on investment.

 

*Concessions*.  The Chilean Electricity Act permits, incertain cases, the generation and transmission of electricity without the needto obtain a concession from the Chilean government.  However, companies may apply for a concessionfrom the Chilean government, particularly to facilitate the use of and accessto third-party properties.  Third-partyproperty owners are entitled to compensation, which may be agreed upon by theparties or, absent agreement, determined by an administrative proceeding thatmay be appealed to Chilean courts.

 

*Recent Regulatory Developments*.  The Chilean Congress amended the ChileanElectricity Act, effective as of June 8, 2000, placing severe penalties ondeficit generators in the event of prolonged periods of electricity shortages.  Electricity rationing may be enforced by theenactment of a rationing decree which is subject to the prior approval

 

33

----

 

by the CNE and the Ministry ofEconomy.  This prior approval iscontingent upon the severity of the prevailing conditions causing theelectricity shortage.

 

The Chilean Electricity Act, as amended, no longer exemptsdeficit generators from fines if power shortages are due to severe drought andstates that such weather conditions will no longer be considered an event of *force majeure*.  Inaddition, the Chilean Electricity Act, as amended, requires that generatorscompensate consumers during periods of rationing as compared to the law priorto amendment, which only compensated surplus generators but did not penalizedeficit generators during power shortages. Companies penalized under the legislation will have the right to appealbut only after they have made a prepayment equal to 25% of the fine.

 

Under the Chilean Electricity Act, as currently ineffect, we may be required to pay fines to the regulatory authorities, makecompensatory payments to electricity consumers affected by the shortage ofelectricity and make payments to generators from whom we are forced to purchaseelectricity in order to meet contractual commitments.  These three types of penalties or paymentsare described below.

 

•                  *Fines*.  The fines, whichcould apply to any electricity company supervised by the CNE and the SEF,including generation, transmission and distribution companies, range from theequivalent of approximately U.S.$ 62 to a maximum of the equivalent ofapproximately U.S.$ 7.4 million. Companies penalized under the legislation will have the right to appealbut only after they have made a prepayment equal to 25% of the fine.

 

•                  *Compensatory Payments By Generation Companies*.  If the Ministry of Economy issues a rationingdecree, generation companies may be required to reimburse distributioncompanies on a *pro rata* basis for credits givento final customers in an amount equal to the product of:

 

(1)          the difference betweenthe rationed end-consumer price specified in the rationing decree and theapplicable node price; and

 

(2)          the difference betweenthe consumers’ actual energy consumption during the rationing period and duringthe same period in the prior year, with certain adjustments.

 

•                  *Failure Cost*.  Chile’sElectricity Law calls for a “failure cost” equal to the amount that must bepaid by deficit generators that cannot meet their contractual commitments tothe surplus generators to deliver electricity during periods when a rationingdecree is in effect.

 

On May 30, 2001, the Ministry of Economy issuedResolution No. 88, which stated that generation companies are required tosupply electricity to distribution companies that have been unable to contractadequate supply to deliver to their customers. The last amendment to the electricity law through the Law 20,018 (“ShortLaw II”),  established a mechanism oftransitory compensations, under which since the effectiveness of the law (May19, 2005) until December 31, 2008, energy sales derived from Resolution 88 mustbe carried out at the spot price.  Thus,Short Law II temporarily alleviates for our subsidiaries some of the pricingrisks implicit in Resolution 88.

 

*Two main amendments have been recently made toChilean Act.*

* *

*The “Short Law I”*

* *

The Short Law I was approved by Chilean Congress inJanuary 2004 and became effective as of March 2004.  The principle changes implemented by theShort Law I include:

 

•                  anew methodology concerning compensation to, and expansion of, transmissionsystems, reducing generators transmission costs by transferring part of thecost to final customers;

 

•                  reducingthe regulated node price band (called Market Price Band) with respect to thefree customer contract price from 10% to 5% (later modified by Short Law II);and

 

34

----

 

•                  modifyingthe definition of unregulated customer, defined as a final customers with aconnected capacity equal to or greater than 2000 kW and consumers with aconnected capacity between 500 and 2000 kW who choose to be unregulatedconsumers (effective in 2006).

 

*The “ShortLaw II”*

* *

On May 19, 2005, the Chilean Congress approved a newmodification to the Electricity Law, which was enacted through Law No. 20,018,(“Short Law II”).  Of the modificationsthat were introduced, the most relevant to us was the increased flexibility ofthe node price band that relates theoretical node prices to non-regulatedcustomer prices.  Under the regulationapproved by Short Law I, the node prices could only be 5% above or below thenon-regulated prices, despite the fact that theoretical prices could besignificantly different.  Under theamendment, if the difference between the average contracted market price (whichincluded the price of long term contracts with distribution companies) and thetheoretical price is lower than 30%, the regulated price will be equal to theaverage contract market price +/-5%. If such difference is greater than 80%, the regulated price will beequal to the average contract market price +/- 30%.  If such difference is between 30% and 80%,the adjustment will be calculated according to an equation leading to a nodeprice within 5% and 30% of the average contracted market price.

 

***Environmental Regulation***

*** ***

The Chilean Constitution of 1980 grants to allcitizens the right to live in an environment free of pollution.  It further provides that other constitutionalrights may be limited in order to protect the environment.  Although Chilean environmental regulation isnot as well developed as in the United States and certain other countries,Chile has numerous laws, regulations, decrees and municipal ordinances that mayimpose environmental restrictions.  Amongthem is *Law No. 18,902 de la Superintendencia de ServiciosSanitarios 27/01/1990* and the Sanitary Code, which containsprovisions relating to waste disposal, the establishment of industries in areasin which they may affect public health and the protection of water for humanconsumption.  The regulations providethat no industrial entity may dispose of substances that may pose a risk toirrigation or consumption in any sewer or natural or artificial body of waterwithout prior authorization from the Ministry of Public Works and a favorabledetermination from the Superintendency of Sanitary Services.  The regulations also mandate governmentalapproval of any systems that an industrial entity proposes to use for thepurpose of neutralizing or purifying liquid industrial residues.

 

Endesa Chile’s operations in Chile are subject to*Law No. 19,300* (the “Chilean Environmental Act”) which wasenacted in 1994.  The ChileanEnvironmental Law requires Endesa Chile to conduct environmental impact studiesof any future projects or activities that may affect the environment and toarrange for the review of such studies by the Chilean Environmental Commission(“CONAMA”).  It also requires either anevaluation of the environmental impact by the Chilean government or the postingof an environmental insurance policy ensuring compliance with standards foremissions, noise, waste and disposal and authorizes the relevant ministries toestablish emission standards.  TheChilean Environmental Law was implemented by *ReglamentoNo. 30 del Ministerio Secretaria General de la Presidencia*(“RegulationNo. 30”) dated March 20, 1997. Endesa Chile applies the guidelines set out in Regulation No. 30 inanalyzing the development of future projects.

 

***Water Rights***

*** ***

Endesa Chile owns unlimited duration unconditional andabsolute property water rights granted by the Chilean Water Authority.  However, in March 2005, the Chilean Congressapproved a modification to the current laws governing unused water rights.  Under the amended law, beginning on January1, 2006, Chilean generation companies will have to pay an annual license forsuch unused water rights.  We areconstantly analyzing which water rights we will maintain for the future andwhich we will disregard.  If we determinethat some water rights will not be used for a future project, we will abandonsuch water rights in order to avoid liability for license payments.  We estimate that in the event that we do notabandon any water rights in the SIC, we will have to pay license feesaggregating no more than U.S.$ 4.3 million per year.  License fee payments carried out during theeight years before the commencement of any project, or the use of such waterrights, may be recovered through a tax credit that is applied monthly until thelicense fee payments are recovered in full.

 

35

----

 

In the case of water rights located in the extremesouth of Chile (in particular, the eleventh and twelfth regions, outside thearea comprised by the SIC), the license fees will be paid starting as ofJanuary 1, 2012, using the same tax refund regime mentioned above for theSIC.

 

***Operations in Argentina***

*** ***

Operating income from the Company’s business inArgentina represented 12.1%, 14.4%, and 14.0% for years 2003, 2004 and 2005 ofour total operating income.  Operatingrevenues and expenses for the three years are shown in the following table:

 

**TOTAL OPERATINGINCOME FROM OPERATIONS IN ARGENTINA**

 
| ** **         | ** ** | **Year ended December 31,**                    | ** ** |
|--------------------|------------|---------------------------------------------------------------|------------|
| ** **         | ** ** | **2003**                                                      | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **         | ** ** | ***(in millions of constant Ch$ )*** | ** ** |
| Operating Revenues |       | 118,167                                                       |       | 153,638 |   | 156,795 |   |
| Operating Expenses |       | 81,808                                                        |       | 115,360 |   | 141,254 |   |
| Operating Income   |       | 34,313                                                        |       | 35,616 |   | 12,913 |   |

 

For details on the variations of yearly monetaryfigures, please see “Item 5. Operating and Financial Review and Prospects.”

 

Endesa Chile participates in electricity generation inArgentina through its subsidiaries Endesa Costanera and El Chocón,with a total of 5 power plants, two of which are hydroelectric plants, withtotal installed capacity of 1,320 MW, and three of which are thermal plants,with a total installed capacity of 2,304 MW. In 2005, Endesa Chile’s hydro and thermal generation plants in Argentinarepresented 16% of the MEM’s generation capacity, in accordance with the *Compañía Administradora del Mercado Mayorista Eléctrico S.A.*,or CAMMESA.

 

We also participate in thetransmission and trading of electricity in Argentina through our relatedcompanies, *Compañía de Transmisión del Mercosur S.A.*(“CTM”),which owns the Argentine side of a transmission interconnection line withBrazil, and CEMSA, a trading company that has signed contracts with generatorsin Argentina to export electricity from Argentina to Brazil and Uruguay.  We previously had, until September 30, 2005, a45% ownership share in both CTM and CEMSA through its affiliates, CIEN andEndesa Argentina S.A., respectively. As of October 1, 2005, our ownership share in CIEN and CTM wascontributed to Endesa Brasil, decreasing Endesa Chile’s indirect share inboth companies to 37.8%.  Our share inCEMSA has not been modified.  See “Item4. Information on the Company—C. Organizational Structure” for details on associated companies.  As of December 13, 2005, our Argentinesubsidiaries Endesa Costanera and El Chocón participate in two newcompanies, “Termoeléctrica Manuel Belgrano S.A.” and “Termoeléctrica Josede San Martin S.A.”, created to undertake the construction of newgeneration facilities in connection with FONINVEMEM.  (See “Item 4. Information on the Company—B.Business Overview—ElectricityGeneration in Argentina – Industry Structure and Regulatory Framework”; alsosee “Item 4. Information on the Company—A. History and Development of the Company” for further detail).  Our subsidiary HidroeléctricaEl Chocón S.A. has a 17.0% direct share in each of these newcompanies and Endesa Costanera S.A. has a 6.1% direct share of eachnew company.

 

Endesa Costanera’sinstalled capacity is thermal and accounted for approximately 10% of the totalinstalled capacity in the Sistema Interconectado Nacional (the “Argentine MEM”),Argentina’s major interconnected grid system, as of December 31, 2005.  Endesa Costanera’s Combined Cycle IIplant is the largest combined cycle in Argentina that can operate with naturalgas and diesel.  Our 1,131 MW SteamTurbine power plant can operate with either natural gas or fuel oil.

 

El Chocón is currently the second largest privatehydroelectric facility in Argentina, accounting for approximately 6% of theinstalled capacity in the Argentine SIN as of December 31, 2005.  El Chocón has a 30-year concession fortwo hydroelectric generation facilities with an aggregate of 1,320 MW ofinstalled capacity.  The larger of thetwo facilities for which El Chocón has a concession has 1,200 MW ofinstalled capacity and is the primary flood control installation on the LimayRiver.  The facility’s large reservoir,Ezequiel Ramos Mejía, enables

 

36

----

 

El Chocón to be one of theArgentine SIN’s major peak suppliers. Variations in El Chocón’s discharge are moderated by El Chocón’sArroyito facility, a downstream dam with 120 MW of installed capacity.

 

The following table sets forth the installed capacityof our Argentine subsidiaries:

 

**INSTALLED CAPACITYPER SUBSIDIARY IN ARGENTINA (MW)**

 
| ** **                                                 | ** **   | **As of December 31,** | ** **   |
|------------------------------------------------------------|--------------|---------------------------------------|--------------|
| ** **                                                 | ** **   | **2003**                              | ** **   | **2004** | ** ** | **2005** | ** ** |
| **Endesa Costanera S.A.**                             | *** *** | *** ***                          | *** *** | *** *** | *** *** | *** *** | *** *** |
| Costanera Steam Turbine                                    |         | 1,131.0                               |         | 1,131.0 |   | 1,131.0 |   |
| Costanera Combined Cycle II                                |         | 851.0                                 |         | 852.0 |   | 851.0 |   |
| Central Termoélectrica Buenos Aires  Combined Cycle I |         | 320.0                                 |         | 320.0 |   | 321.6 |   |
| **Hidroeléctrica El Chócon S.A.**      |         |                                  |         |   |   |   |   |
| El Chócon Hydroelectric                          |         | 1,200.0                               |         | 1,200.0 |   | 1,200.0 |   |
| Arroyito Hydroelectric                                     |         | 120.0                                 |         | 120.0 |   | 120.0 |   |
| **Total**                                                  |         | 3,622.0                               |         | 3,623.0 |   | 3,623.6 |   |

 

Our total electricity generation in Argentina reached12,332.5 GWh in 2005, 9.2% higher than the 11,289.7 GWh in 2004, and 54% higherthan the 7,996.5 GWh registered in 2003. Our generation market share was approximately 13% of total electricityproduction in Argentina for 2005, approximately 13% for 2004 and 10% for 2002.

 

The following table sets forth the electricitygeneration of our Argentine subsidiaries:

 

**ELECTRICITYGENERATION PER SUBSIDIARY IN ARGENTINA (GWh)**

 
| ** **                                        | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                        | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| Endesa Costanera S.A.                        |       | 3,958.2                                    |       | 7,859.0 |   | 8,401.8 |   |
| Hidroeléctrica El Chocón S.A. |       | 4,038.3                                    |       | 3,430.7 |   | 3,930.7 |   |
| **Total**                                         |       | 7,996.5                                    |       | 11,289.7 |   | 12,332.5 |   |

 

Low-cost hydroelectric generation accounted for nearly32% of total generation in 2005, higher than in 2004 because of a relativelyrainy year compared to 2004.  Thepercentage of hydroelectric generation in 2003 reached 51%, as shown in thefollowing table:

 

**HYDRO/THERMALGENERATION IN ARGENTINA (GWh)(1)**

 
| ** **               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **               | ** ** | **(GWh)**                                  | ** ** | **%** | ** ** | **(GWh)** | ** ** | **%** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Hydroelectric Generation |       | 4,038.3                                    |       | 50.5 |   | 3,430.7 |   | 30.4 |   | 3,930.7 |   | 31.9 |   |
| Thermal Generation       |       | 3,958.2                                    |       | 49.5 |   | 7,859.0 |   | 69.6 |   | 8,401.8 |   | 68.1 |   |
| Total Generation         |       | 7,996.5                                    |       | 100.0 |   | 11,289.7 |   | 100.0 |   | 12,332.5 |   | 100.0 |   |

 

----

(1)          Generationminus our own power plant consumption and technical losses.

 

Our physical energy sales in Argentina reached 9,259GWh in 2003, 11,604 GWh in 2004 and 12,579 GWh in 2005.  The portion of physical sales supplied by ourown generation of energy reached 97.6% of total sales in 2005 while salessupplied by energy purchased from other generators represented 2.4% of totalsales in 2005, as set forth in the following table:

 

37

----

 

**PHYSICALPRODUCTION AND PURCHASES IN ARGENTINA (GWh)**

 
| ** **             | ** ** | **2003**  | ** ** | **2004** | ** ** | **2005**  | ** ** |
|------------------------|------------|-----------|------------|----------|------------|-----------|------------|
| ** **             | ** ** | **(GWh)** | ** ** | **%**    | ** ** | **(GWh)** | ** ** | **%** | ** ** | **(GWh)** | ** ** | **%** | ** ** |
| Electricity Production |       | 7,167.4   |       | 90.5     |       | 11,289.7  |       | 97.3 |   | 12,332.5 |   | 97.6 |   |
| Electricity Purchases  |       | 750.0     |       | 9.5      |       | 312.6     |       | 2.7 |   | 307.6 |   | 2.4 |   |
| Total(1)               |       | 7,917.4   |       | 100.0    |       | 11,602.3  |       | 100.0 |   | 12,640.1 |   | 100.0 |   |

 

----

(1)          Energyproduction plus energy purchases differs from electricity sales in 2005 due to61 GWh of energy not billed in that year, given that our own power plantconsumption and technical losses have already been deducted.

 

The company’s physical sales market share decreasedfrom 18% in 2001 to 10% in 2002 but increased to 12% in 2003 and to 14% in 2004and 2005.  Contracted sales in 2005represented 14% of total physical sales and pool market sales accounted for theremaining 86%.  The increase incontracted sales in 2005 compared to contracted sales in 2004 responds to theincrease in sales to unregulated customers, while taking account of theoperating conditions of the Wholesale Electricity Market (“WEM”).

 

Endesa Costanera’s physical sales reached 8,466GWh in 2005, compared to 7,973 GWh in 2004 and 4,583 GWh in 2003.  The increase in 2005 reflects the increase inEndesa Costanera’s generation. Endesa Costanera’s ability to operate with either natural gas orliquid fuel oil in addition to a growing electricity demand and the lack ofinvestment in both natural gas and electricity generation facilities, hasexplained the company’s increased generation. Due to the lack of investment in the electric power sector arising froma governmental policy that does not allow for realistic increases inelectricity prices, the Secretary of Energy, through Resolution No. 712/2004,created a fund (“FONINVEMEM”) to allow for the financing and management of allinvestment aimed at increasing the electric power supply within the WholesaleEnergy Market (WEM).  (See “Item 4.Information on the Company—B. Business Overview—Electricity Generation inArgentina—Industry Structure and Regulatory Framework”; also see “Item 4.Information on the Company—A. History and Development of the Company” forfurther detail).

 

Until August 2005, Endesa Costanera had gassupply long-term contracts, but these are currently not in effect due toResolution No. 752/05 prohibiting gas distribution companies from selling tolarge consumers, including electricity generation companies, which are requiredto purchase directly from natural gas producers.  Since September 1, 2005,Endesa Costanera,has been renewing its contracts on a monthly basis.  This situation is expected to be solved inthe short term, allowing the purchase of gas with a medium-term horizon.  The liquid fuel supply is carried out in thespot market under competitive conditions.

 

In 2005 the Argentina-Brazil Interconnection line wasdispatched with 525 GWh of electricity. The energy sold by Endesa Costanera for the Interconnection was 289GWh.  From February 2002 until February2005 the dispatch of the line had been zero given the conditions of electricitysupply in the Brazilian market during that period.  Because of the scarcity of electricity inArgentina, governmental authorities have operated the electricity industryunder special conditions; that is, since 2002 they have limited the spot priceof electricity to the variable cost of generating electricity with natural gas,without considering the hydrological conditions of rivers and reservoirs or theuse of more expensive liquid oil.  Theauthorities have also limited the access to the electricity spot market and theuse of natural gas to export energy to Brazil, which affected the normaloperations of the export contracts. Endesa Costanera was not able to fully comply with its exportcontracts to Brazil.  On December 9,2005, the Argentine and Brazilian governments signed an agreement to facilitatethe operation of export contracts without the imposition of fines for anynon-compliance, through a transitional period ending December 31, 2008.  By that time, the assumption is that the fullArgentine electricity supply should be reestablished.  At the time of this report,Endesa Costanera, CEMSA and the companies in Brazil are, based on thepreviously mentioned agreement, working on restructuring the electricity exportcontracts.

 

Physical sales of El Chocón were 4,113 GWh in2005, 3,630 GWh in 2004, and 4,676 GWh in 2003. The relative rainy conditions in 2005 explain the increase of 13% whencompared to 2004.  Contracted salesincreased from 989 GWh in 2004 to 1,145 GWh in 2005.  Contracted sales to the mining firm *Minera Alumbrera* represented

 

38

----

 

42% of total contracted salesin 2005, *Profertil* represented 20%, MASSUH 11%, *Petroken* 3% and others 24%. The remaining 2,968 GWh in sales were delivered to the pool market.

 

The distribution of physical sales in Argentina, interms of customer segment, is shown in the following table:

 

**PHYSICAL SALES PERCUSTOMER SEGMENT IN ARGENTINA (GWh)**

 
| ** **              | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **              | ** ** | **(GWh)**                                  | ** ** | **% of Sales  Volume** | ** ** | **(GWh)** | ** ** | **% of Sales  Volume** | ** ** | **(GWh)** | ** ** | **% of Sales  Volume** | ** ** |
| Contracted Sales        |       | 1,117                                      |       | 12.1 |   | 1,855 |   | 16.0 |   | 2,328 |   | 18.5 |   |
| Non-Contracted(1)       |       | 8,142                                      |       | 87.9 |   | 9,749 |   | 84.0 |   | 10,251 |   | 81.5 |   |
| Total Electricity Sales |       | 9,259                                      |       | 100.0 |   | 11,604 |   | 100.0 |   | 12,579 |   | 100.0 |   |

 

----

(1)          Salesin the anticipated spot market are included as non-contracted sales.

 

We operate El Chocón for a fee pursuant to anoperating agreement with a term equal to the duration of the concession (30years starting August 1993). El Chocón does not have the right to terminate the operatingagreement, except following the non-performance of Endesa Chileobligations.  Under the terms of theoperating agreement, we are entitled to a fee payable in U.S. dollars based onEl Chocón’s annual gross revenues, payable in monthly installments.

 

Our Argentine power plants compete with all the majorpower plants connected to the SIN.  Ourmajor power plant competitors in Argentina include *Piedra delAguila* (hydro 1,400 MW) and *Central Puerto*(thermal 2,152 MW) owned by *Totalfina*, thethree plants owned by the AES Group, San Nicolás (thermal 675 MW), Paraná(thermal 845 MW) and Alicura (hydro 1,040 MW), and *PetrobrasEnergía S.A.,*which competes with us through two power plants, *Genelba* (thermal 674 MW) and *Pichi PicúnLeufú*(hydro 285 MW).  Anothersignificant power plant is *TermoAndes*(thermal600 MW) owned by AESGener S.A. but not connected to the SIN.

 

***Electricity Generation in Argentina—Industry Structureand Regulatory Framework***

*** ***

*Ley Nacional*No. 24,065 of January 1992 (the “Argentine Electricity Act”) divides the electricityindustry into three sectors: generation, transmission and distribution.  The generation sector is organized on acompetitive basis with independent generation companies selling their output onthe Wholesale Electricity Market (“WEM”) or by private contracts with certainother market participants.  Transmissionis organized on a regulated basis. Transmission companies are required to provide third-party access to thetransmission systems they own and are authorized to collect a toll fortransmission services.  Transmissioncompanies are prohibited from generating or distributing electricity.  The major transmission company is *Compañía de Transporte de Energía Eléctrica en Alta Tensión S.A.*orTransener.  Distribution involves thetransfer of electricity from the supply points of transmitters toconsumers.  Distribution companiesoperate as geographic monopolies, providing service to almost all consumerswithin their specific region. Accordingly, distribution companies are regulated as to rates and aresubject to service specifications. Distribution companies may acquire the electricity needed to meetconsumer demand on the WEM or through contracts with generation companies.

 

The WEM classifies large users of energy into threecategories, Major Large Users (“GUMAs”, in its Spanish acronym), Minor LargeUsers (“GUMEs”, in its Spanish acronym) and Large Particular Users (“GUPAs”, inits Spanish acronym).  Users in each ofthe three categories may freely negotiate their supply contract prices withgenerating companies.  GUMAs are allusers with a peak capacity demand of at least 1.0 MW and a minimum annualenergy consumption of 4.38 GWh.  GUMAsmust contract to purchase at least 50% of their demand and purchase the rest inthe pool market.  GUMEs are all userswith peak capacity demand ranging between 0.03 MW and 2.0 MW.  GUPAs are all users with a peak demandranging between 0.03 MW and 0.1 MW. GUMEs and GUPAs are not required to have minimum annual energyconsumption.  GUMEs and GUPAs mustcontract to purchase all of their demand and do not make any transactions inthe pool market.

 

39

----

 

The regulation also recognizes the following entitiesas participants in the WEM:

 

•                  powertraders, who market generation capacity and energy demand by entering intocontracts with generators and large consumers;

 

•                  provinceswhich can sell the energy received under royalty rights; and

 

•                  foreigncompanies that are part of import/export energy contracts.

 

*Dispatch and Pricing*

* *

The Argentine electricity dispatch system, like theChilean system, is designed to ensure that the most efficiently producedelectricity reaches customers.  SINcoordinates the generation, transmission, and distribution of electricity.  Generation companies sell their electricityto distribution companies, power traders and large users in the competitive WEMthrough freely negotiated supply contracts or in the electricity pool market atprices set by the CAMMESA.  The operationof the WEM is the responsibility of CAMMESA. CAMMESA’s shareholders are generation, transmission and distributioncompanies, large users (through their respective associations) and theSecretariat of Energy.

 

All generation companies that are in the SIN pooloperate in the WEM.  Distributioncompanies, power traders and large users that have entered into supplycontracts with generation companies pay the contractual price.  Large users who contract directly withgeneration companies must also pay their distribution companies a toll for theuse of their distribution networks.  Theseasonal price is the price paid by distribution companies for electricity fromthe pool and is a fixed price reset every six months by CAMMESA and approved bythe Secretariat of Energy according to supply, demand, available capacity andother factors.  The seasonal price ismaintained for at least 90 days. Thereafter, CAMMESA updates assumptions underlying the models employedto establish the seasonal price based on current data and results provided bycompanies that are members of the WEM. If the Secretariat of Energy finds significant variance among currentand prior data, it may resolve to change the seasonal price.  The spot price is the price paid togeneration companies, or by power traders marketing generation capacity, forenergy dispatched under CAMMESA’s direction. The hourly spot price paid for energy reflects the marginal cost ofgeneration.

 

The actual operation of CAMMESA involves the dispatchof generating resources without regard to the contracts among generationcompanies, power traders and distribution companies or large users.  Consequently, a generation company’s capacitymay be dispatched to provide more or less energy to the pool irrespective ofits contractual commitments.  Under thesecircumstances, the generation company will be required to buy or sell excessenergy from or to the pool at spot prices.

 

*Transmission Tariff*

* *

The transmission tariff that must be paid by entitiesengaged in generation and distribution activities and by large users can bebroken down into: (1) a connection charge that underwrites the costs ofoperating the equipment that links them to the transmission system; (2) acapacity charge that underwrites the cost of operating and maintaining lines;and (3) a variable charge based on the aggregate amount of electric energytransported to cover losses that occur during transmission.

 

*Regulation ofHydroelectric Operations*

* *

*Ley Nacional No. 23,896*of 1990 created the Basin Authority of the Limay, Neuquén and Negro Rivers (the“Basin Authority”).  The Basin Authorityis responsible for the administration, control, use and preservation of thebasin of the Limay, Neuquén and Negro Rivers, and for the adequate managementof related water resources.  The BasinAuthority monitors compliance by El Chocón and other hydroelectricconcession holders in the region with the provisions of their respectiveconcession agreements, environmental laws and the Basin Authority’sresolutions.  The Basin Authority alsoserves as a forum for public hearings at which complaints against those holdingconcessions can be heard and resolved.

 

The Entity for the Safety of Dams (“ORSEP” in itsSpanish acronym) is in charge of supervising the safety of El Chocón’sdams, and of any additional works performed by El Chocón.  ORSEP supervises and inspects the

 

40

----

 

construction, operation,maintenance, repair or modification of the works related to the dams andrelated structures in order to monitor their safety and to protect persons andassets.  ORSEP is empowered to: (1)inspect and verify the functioning of any part of the dams or relatedstructures; and (2) require reports on (a) the design, construction, operation,maintenance, use, repair or modification of dams and related structures and (b)any situation which may cause risk to the dam or any death or injury caused bysuch dams or related structures.  ORSEPalso handles the approval of quality control programs submitted byEl Chocón, the determination of specifications to prevent accidents andthe maintenance of public safety within the area of the dams and relatedstructures.

 

*Emergency Measures*

* *

As of the date of this annual report, the Argentineelectricity regulatory framework is undergoing profound changes, the effect ofwhich is hard to evaluate in terms of long-lasting impacts.  Although Law 24,065 has not been formallyrepealed, the trend that has been observed since 2002 leads us to believe thatthere will be increased state intervention that will modify the regulatoryframework described in this annual report. In particular, in January 2002, the Argentine congress approved thePublic Emergency and Reform of the Exchange Regulation Law 25,561 (the “EconomicEmergency Law”).  This law authorized theforced renegotiation of public service contracts, imposed the conversion ofU.S. dollar denominated obligations into Argentine pesos at a rate ofAR$ 1 per U.S.$ 1 (with some exceptions) and empowered the FederalExecutive Power to implement, among other things, additional monetary,financial and exchange measures to overcome the economic crisis in the medium term,such as creating a system for determining the rate at which the Argentine pesois to be exchanged into foreign currencies.

 

From December 3, 2001 to May 6, 2003, the Argentinegovernment imposed a number of monetary and currency exchange control measuresthat included restrictions on the free transfer of funds deposited with banksand severe restrictions on transferring funds abroad, with certain exceptionsfor transfers related to foreign trade and other authorized transactions.  The restrictions requiring the ArgentineCentral Bank’s prior authorization for the transfer of funds abroad in order tomake payments of principal and/or interest, which were in place during 2002,were progressively reduced from January to May 2003.

 

*Regulatory Changes during2002, 2003, 2004  and 2005*

* *

In 2002, the Secretary of Energy introduced someregulatory measures (Resolutions Nos.  2,8 and others) in order to correct the mismatches produced by the devaluation ofthe Argentine peso and to ensure the normal operation of generationactivities.  An important provision, withrespect to the calculation of spot prices, is the recognition of the U.S.dollar as the correct currency of denomination for certain variable costs ofproduction such as liquid fuels, which are tradable goods, some foreignmachinery spare parts and long-term maintenance contracts with equipmentsuppliers that are denominated in foreign currency.

 

A second important aspect of these regulatory measureswas to adjust the price stabilization system in order to identify real costsand prices, reduce price volatility and diminish the arbitrage risk resultingfrom differences between spot prices and seasonal prices.  In this respect, an anticipated pool markethas resulted that introduces a prior pricing adjustment to energy prices thatacts as a price stabilization system.

 

Subsequently, the Secretary of Energy enactedResolution No. 246/02 which establishes various regulatory changes.  The following are the more significantmeasures:

 

•                  theseparation of capacity and energy payments such that the capacity payments aretied to availability and short-term reserves are regulated and tied tocommitment reserves;

 

•                  themodification of energy supply guarantee rights and obligations, supply priorityand demand disruptions, and regulation of short- and medium-term reserves forservice disruption conditions with respect to large customers;

 

•                  anew capacity relief scheme proposed by CAMMESA;

 

•                  theintegration of node and adaptation factors for demand without affecting thecalculation of the variable transmission remuneration and energy delivered bygenerators and traders;

 

41

----

 

•                  theacknowledgement of new tax rates that are applied to natural gas, oil and fueltransfers as additional costs;

 

•                  conditionsof the contract market are eased and expanded; and

 

•                  theadjustment of forced generation regulations.

 

On July 18, 2002 Resolution No. 317 of the Secretaryof Energy, which supplements Resolution No. 246, increased the capacity paymentfrom 10 Ar$/MW to 12 Ar$/MW in the hours that the capacity is remunerated.  Finally, on January 2, 2003 the Secretary ofEnergy enacted Resolution SE No. 1/03, whose principal features are thefollowing:

 

•                  theremuneration for generators with variable cost higher than the first failurecost step (120 Ar$/MWh) is incremented;

 

•                  establishmentof a new reserve service to ensure availability in areas where shortage ofnatural gas in winter will be foreseen;

 

•                  adjustmentof the reserve service reliability to cover the peak time capacity demand;

 

•                  re-establishmentof the anticipated pool market operation for seasonal energy transactions; and

 

•                  institutionof a transitional process to identify and manage the high voltage system anddistribution expansions and to improve the availability of energy supply.

 

With respect to generation, the regulatory changes areintroduced to:

 

•                  increasethe actual spot price transparency to improve the predictability of thegenerators’ remunerations and facilitate their decisions; and

 

•                  graduallyobtain a more stable seasonal price.

 

With respect to transmission, the regulatory changesare introduced to:

 

•                  providemore environmentally friendly practices and create incentives to accomplishcertain critical projects; and

 

•                  reviewthe operational and design guidelines to meet the safety and operatingrequirements enacted in the law.

 

By means of Resolution No. 82/2003 and Resolution No.784/2003, the Secretary of Energy approved the winter seasonal scheduling,quarterly reschedulings and summer seasonal schedulings for the WEM,maintaining the seasonal prices to be paid by the distributors at levelssimilar to those in force in November 2002. Therefore, the 2003 energy winter prices continue, and the 2003/2004energy summer prices continued, to omit the increase required to cover the spotprices payable to the generation companies. As a consequence, the seasonal stabilization fund (created by theregulation to collect the seasonal stabilization prices paid by distributorsand to provide the amounts to cover the gap between the spot prices that varyon an hourly basis and the seasonal prices that are passed through to the endusers by the distributors) is now depleted.

 

On August 14, 2003 the Secretary of Energy tookfurther measures pursuant to Resolution SE No. 240/2003 which imposed, untilcertain alleged restrictions in the supply of natural gas are overcome, anartificial cap on the energy spot price as a result of ignoring the actualrestrictions of gas supply to electricity generation companies, which may occurin real time operation for calculating the spot price.  According to the Resolution, the WEM does notconsider variable costs reflecting liquid fuels prices but only natural gastariffs, in order to recognize marginal costs to define the energy spot price,and excludes the possibility that water values declared by hydro facilities andhourly import transactions of energy may set spot prices in the event they arehigher than the variable costs of the marginal unit using natural gas.  Further, Resolution SE No. 240/2003 alsodiscriminates against hydro generators,

 

42

----

 

by not permitting them torecognize their generation costs in excess of the node price, whereas thermalgenerators’ variable costs over and above the node price continue to berecognized as a temporary excess dispatch cost.

 

Additionally, in accordance with Resolution SE No.406/2003, the Secretary of Energy established a priority for payments in theWEM by which generators are compensated only after certain other creditors ofthe WEM are compensated, granting generators priority only in collecting thepart of their remuneration which reflects their operational and transmissioncosts.

 

***Government Resolutions adopted during 2004 and 2005***

*** ***

*The Argentine Gas Crisis*:* *Argentina iscurrently going through what has been called a “Natural Gas Crisis.”  Towards the end of the first quarter of 2004,the Argentine Government announced the restriction of natural gas exports anddistribution within Argentina.  Mostrecent publications establish the main cause of these restrictions to be thelack of investment in extraction and transportation capacity within Argentina,as well as the increased internal demand for natural gas.  According to analysts, both elements are dueto the pesification of natural gas contracts and the freezing of the price ofnatural gas in Argentina since the beginning of 2002.  The resulting artificially low price wouldhave encouraged consumers to replace more expensive oil-derived energy withnatural gas, leading to an explosive growth in demand.  At the same time, the fixed, low price ofnatural gas discouraged producers from investing in natural gas exploration andincreasing their extraction and transportation capacity.  Consequently, current supply is not able tosatisfy internal demand and export commitments.

* *

For the “Natural Gas Crisis,” the Secretary of Energy,through resolution 208/2004 of April 2004, approved an agreement with naturalgas producers to reestablish the gas price. Under this agreement the natural gas price rose to U.S.$ 1.00/MMBTUin July 2005, an increase of more than 100%.

 

Within the framework of public social, economic,financial and exchange conditions and due to a severe lack of financing in theelectric power sector arising from a governmental policy that does not allowfor increases in utilities’ fees, new investments from private power generatorsaimed at satisfying the growing demand of electric power were not foreseen inthe short term.  Accordingly, theSecretary of Energy, through Resolution No. 712/2004, created a fund (“FONINVEMEM”)to allow for the financing and management of all investment aimed at increasingthe electric power supply within the Wholesale Energy Market (WEM).

 

In order to organize FONINVEMEM, the Secretary ofEnergy passed Resolution No. 1427/04 on December 6, 2004, under which all privateGenerator Agents of the WEM were called upon to take part in the organizationof FONINVEMEM by investing certain amounts of money to be accrued during theperiod from January 1, 2004 to December 31, 2006, pursuant to Resolution No.406 passed by the Secretary of Energy.

 

Resolution No. 1427/04 provides that those PrivateGenerator Agents who participate in the organization of FONINVEMEM will bepermitted to take part in all necessary projects for the WEMrestructuring.  For that purpose, thegeneral guidelines upon which the generation supply enlargement shall bemanaged were determined.

 

The basic guidelines consist of various commitmentsfrom the Private Agents and the Secretary of Energy, including the following:

 

A.    Commitmentsfrom the Secretary of Energy:

 

(i)    To passseasonable prices that can be transferred to large and medium demand rates insuch a way that as from July 1, 2005, these prices may cover, to a minimaldegree, the total monomial costs of the WEM arising from enforcement of the ResolutionNo. 240/03 passed by the Secretary of Energy.

 

(ii)   To passseasonable prices that can be transferred to the rates, with the exception ofthe social rate, in order to reach, at November 1, 2006, values capable ofcovering at least the total monomial costs of the WEM, that result fromenforcing the provisions of Resolution No. 240, passed by the Secretary ofEnergy on August 14, 2003 and complementary resolutions thereof.

 

43

----

 

(iii)  To pass,no later than the first seasonal scheduling after the commercial operationcommencement of the investment projects to be carried out within thisframework, seasonal prices that allow the guarantee of payment to the WEM’sgenerators through rate collection.

 

(iv)  From thetime of commencement of commercial operation of the new equipment built withthe FONINVEMEM’s resources, to compensate the power readily made available byhourly compensation equivalent to Ar$ of the amount that was paid prior the LawNumber 25,561 and to compensate the energy supplied to the system, determiningas a computation base, the Production Variable Costs, being the highestProduction Variable Cost to be accepted equal to the Reference Price plus 15%.

 

(v)   Once theMarket readjusts from the commercial operation commencement of the newequipment built with the FONINVEMEM’s resources, to leave without effectResolution No. 240 and to compensate the generators with the System MarginalPrice, in a free Spot Market, taking into account the cost of the energy thatwas not supplied and with a water value that represents the thermal replacingvalue.

 

(vi)  To fosterthe necessary regulatory changes so that, after the WEM restructuring:

 

Medium and large demands are bound to retain at least75% of their electric power consumption.

 

•                  Thesupply of the growing demand that is not authorized to manage its own supply(Distributors’ demand) may be gradually and subsequently called for bids,through contracts with new Generation, for a minimum term which initially maybe of four (4) years.

 

•                  Bidsfor the energy hiring to be produced from the Project or Projects that are tobe carried out with FONINVEMEM funds are called in order to facilitate theirpossible financing.

 

(vii)         Tocreate the regulatory instruments that allow for natural gas firmtransportation hiring and natural gas purchases, in addition to the currentlyretained transportation, aimed at generating electric power, and trying toadapt the natural gas supply to the requirements of the power plants.

 

(viii)        Oncethe WEM has been restructured, electric power export contracts authorizedtherein have the same possibilities of purchasing the shortage amounts ofelectric power in the spot market as domestic demand, at the rates to bedetermined pursuant to paragraph (iv).

 

(ix)   To abideby the contracts currently in force in the WEM.

 

B.    Commitmentsundertaken by the Private Agents:

 

(i)    Tocontribute as a guarantee of performance of all necessary projects aimed atrestructuring the WEM, between a minimum of 65% and the total amount of certainfunds, pursuant to Resolution No. 406, passed by the Secretary of Energy.

 

(ii)   To takeall the steps to manage the necessary projects to restructure the WEM,undertaking the commitment to carry out the pertinent Projects and works sothey can be ready to commercially operate as from 2007.

 

(iii)  To obtainthe necessary financing to carry out the projects and the necessary works forthe WEM restructuring on the committed deadlines.

 

The Secretary of Energy passed Resolution No.1193/2005 on October 14, 2005, under which all private Generator Agents of theWEM were called to express formally their agreement to guide the construction,operation and maintenance of the electric energy generation plants inaccordance with the FONINVEMEM.  BothEndesa Costanera and El Chocón agreed with Resolution S.E. No.1427/2004, and by participating in the organization of FONINVEMEM, will takepart in necessary projects for the WEM restructuring.  The amount of money invested will be pursuantto Resolution S.E. No. 406, which sums have amounted, in 2005, to approximatelyU.S.$ 7 million and U.S.$ 36 million, respectively.  The development throughout the remainingperiod will depend, among other factors, on CAMMESA’s dispatch of generation unitsof both power plants.

 

44

----

 

***Environmental Regulation***

 

The operations of electricity generation facilitiesare subject to federal and local environmental laws and regulations, including *Ley Nacional No. 24,051* (the “Hazardous Waste Law”) enactedin January 1992 and its implementing decree, Decree No. 831/93, which regulatesthe disposal of hazardous waste in Argentina.

 

Pursuant to the terms and conditions established bythe Argentine government for the concession relating to El Chocón’shydroelectric facilities and the purchase of Endesa Costanera,El Chocón and Endesa Costanera must comply with certain reportingrules, monitoring obligations and emission standards.  The failure by El Chocón andEndesa Costanera to comply with these requirements as well as federal andlocal environmental legislation entitles the Argentine government to imposepenalties, and in certain cases, cancel the El Chocón concession agreementor order the suspension of operations of Endesa Costanera.  Endesa Costanera and El Chocón havefiled reports pursuant to the Hazardous Waste Law and its implementing decree,Decree 831/93.  They have been informedthat they have been classified as “eventual” generators of hazardouswaste.  We believe that El Chocónand Endesa Costanera are in compliance with all material obligationsrelating to environmental matters.

 

**Operations inColombia**

 

Operating income from our business in Colombiarepresented 22.6%, 24.3% and 23.0% for 2003, 2004 and 2005 of our totaloperating income.  Operating revenues andexpenses for the three years are shown in the following table:

 

**TOTAL OPERATINGINCOME FROM OPERATIONS IN COLOMBIA**

 
| ** **         | ** ** | **Year ended December 31,**                  | ** ** |
|--------------------|------------|-------------------------------------------------------------|------------|
| ** **         | ** ** | **2003**                                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **         | ** ** | **(in millions of constant Ch$ )** | ** ** |
| Operating Revenues |       | 234,695                                                     |       | 260,448 |   | 258,758 |   |
| Operating Expenses |       | 127,316                                                     |       | 133,834 |   | 133,028 |   |
| Operating Income   |       | 91,306                                                      |       | 122,721 |   | 120,548 |   |

 

For details on the variations of yearly monetaryfigures, please see “Item 5.  Operatingand Financial Review and Prospects.”

 

We control two electricity generation companies inColombia, Betania and Emgesa.  We have an85.6% ownership interest in Betania, and a 23.4% economic interest inEmgesa.  Betania is the operator ofEmgesa, although it receives no compensation in return.

 

As of December 31, 2005, our Colombian subsidiariesoperated a total of eleven generation plants in Colombia, with a totalinstalled capacity of 2,657 MW as of December 2005, of which 91.1% ishydroelectric.  Betania has one 541 MWhydroelectric facility located in Huila. Emgesa had a total installed capacity of 2,116 MW as of December 31,2005, 88.9% of which was hydroelectric. Emgesa’s main facilities are located in the Cundinamarca region ofColombia.  In January 2005, Emgesa addeda new power plant along the Bogotá River called La Junca, with an installedcapacity of 19.5 MW.

 

Our hydroelectric and thermal generation plants inColombia represent approximately 20% of the country’s total electricitygeneration capacity as of December 2005.

 

The following table sets forth the installedgeneration capacity of our Colombian subsidiaries as of December 31, 2005:

 

45

----

 

**INSTALLED CAPACITYPER SUBSIDIARY IN COLOMBIA (MW)(1)**

 
| ** **                      | ** ** | **(MW)** | ** ** |
|---------------------------------|------------|----------|------------|
| ** **                      | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| **Emgesa**                      |       |     |       |   |   |   |   |
| Guavio (Hydroelectric)          |       | 1,150    |       | 1,150 |   | 1,164 |   |
| Cadena Vieja (Hydroelectric)    |       | —   |       | — |   | — |   |
| Cadena Nueva (Hydroelectric)    |       | 600      |       | 600 |   | 601 |   |
| Termozipa (Thermal)             |       | 223      |       | 223 |   | 236 |   |
| Minor Plants (Hydroelectric)(2) |       | 76       |       | 96 |   | 116 |   |
| **Betania**                     |       |     |       |   |   |   |   |
| Betania (Hydroelectric)         |       | 540      |       | 540 |   | 541 |   |
| Total                           |       | 2,589    |       | 2,609 |   | 2,657 |   |

 

----

(1)          For years 2003 and 2004, installed capacitycorresponds to effective capacity and for 2005 corresponds to gross capacity. Inthe case of Guavio, there are two secondary units of 7 MW each.

 

(2)          AtDecember 31, 2005 Emgesa owned and operated five minor plants: *Charquito*, *El Limonar*, *La Tinta*, *San Antonio*,and *Tequendama*.  On January 1, 2006, the minor plant SanAntonio (19.5 MW) was withdrawn from the SIN and on February 28, 2006, Emgesabought Termocartagena with 186 MW but these changes are not reflected in thischart, which shows information as of December 31, 2005.

 

Approximately 91% of our installed capacity inColombia is hydroelectric.  As a result,our physical generation depends on the reservoir levels and yearlyrainfalls.  Our electricity generation inColombia reached 11,864 GWh in 2005 compared to 11,881 GWh in 2004 and 10,794GWh in 2003.  Our generation market sharein Colombia in 2005 was approximately 24%. In addition to hydrological conditions, the amount of generation dependson our commercial strategy.  Colombia’selectricity market is less regulated than the markets of the other countries inwhich we operate.  Companies are free tooffer their electricity at prices driven by market conditions, as opposed tobeing forced by a centralized operating entity to generate according to theminimum marginal costs of the system. Betania and Emgesa sold approximately 65% of their electricity undercontracts in 2005, with the remainder sold in the spot market.

 

The following table sets forth the energy generationfor each of our Colombian subsidiaries:

 

**ENERGY GENERATIONPER SUBSIDIARY IN COLOMBIA (GWh)(1)**

 
| ** ** | ** ** | **(GWh)** | ** ** |
|------------|------------|-----------|------------|
| ** ** | ** ** | **2003**  | ** ** | **2004** | ** ** | **2005** | ** ** |
| Emgesa     |       | 9,205     |       | 10,028 |   | 9,763 |   |
| Betania    |       | 1,589     |       | 1,853 |   | 2,101 |   |
| Total      |       | 10,794    |       | 11,881 |   | 11,864 |   |

 

----

(1)          Generation minus power plant own consumptionand technical losses.

 

Hydrological conditions in 2005 translated into lessgeneration for Emgesa due to reduced rainfall in its geographic area allowingfor a decrease in the level of physical energy sales, when compared to2004.  Considering that thermalgeneration is not significant, accounting for only 8.9% of our total installedcapacity in Colombia at December 2005, and 2% of total generation in Colombiaduring 2005, maintaining long-term contracts with coal suppliers to assure coalsupply is not critical and these contracts are therefore negotiatedannually.  In 2005, hydroelectricgeneration comprised over 98% of our generation in Colombia.

 

The following table sets forth the levels ofelectricity production and purchases for our Colombian subsidiaries for thepast three years:

 

46

----

 

**PHYSICALPRODUCTION AND PURCHASES IN COLOMBIA (GWh)**

 
| ** **             | ** ** | **Year ended December 31,** | ** ** |
|------------------------|------------|--------------------------------------------|------------|
| ** **             | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(GWh)**                                  | ** ** | **%** | ** ** | **(GWh)** | ** ** | **%** | ** ** | **(GWh)** | ** ** | **%** | ** ** |
| Electricity Production |       | 10,794                                     |       | 74.0 |   | 11,881 |   | 77.9 |   | 11,864 |   | 78.1 |   |
| Electricity Purchases  |       | 3,790                                      |       | 26.0 |   | 3,368 |   | 22.1 |   | 3,321 |   | 21.9 |   |
| Total(1)               |       | 14,584                                     |       | 100.0 |   | 15,249 |   | 100.0 |   | 15,185 |   | 100.0 |   |

 

----

(1)          Energyproduction plus energy purchases exceed electricity sales due to power plantpump consumption.

 

The sole interconnected electricity system in Colombiais the Colombian National Interconnected System, or the Colombian SIN.  Electricity demand in the Colombian SINincreased 3.8% during 2005.  The totalelectricity consumption in the Colombian SIN was 45,711 GWh in 2003, 47,020 GWhin 2004 and 48,829 GWh in 2005.

 

The demand in Colombia’s electricity market has alsobeen affected by the interconnection with the electricity system of Ecuador,which began operations in March 2003, referred to as International Transactionsof Energy (“TIE”).  During 2005, physicalsales to Ecuador reached 1,758 GWh.  Alsoin 2005 a physical connection between Ecuador and Peru was carried out, butthere were no energy exchanges because the framework for operations is not yetcompletely defined.  Bothinterconnections with transmission lines represent a potential for greatercompetition, because generators in Ecuador may generate and export electricityto Colombia.  However, based on the levelof capacity and price levels in each country, it is more likely that Colombiangenerators will be exporting electricity to Ecuador.

 

During 2005, Emgesa served an average of 887 nonregulatedcustomers and 13 distribution companies, and Betania served a total of 8distribution companies.  Our sales to thedistribution company Codensa accounted for 40% of our total contract sales in2005.  Physical sales to the six largestnon-regulated customers altogether reached 4.3% of total contracted sales.

 

The distribution of physical sales, in terms ofcustomer segment, is shown in the following table:

 

**PHYSICAL SALES PERCUSTOMER SEGMENT IN COLOMBIA (GWh)**

 
| ** **              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **              | ** ** | **Sales**                                  | ** ** | **% of Sales  Volume** | ** ** | **Sales** | ** ** | **% of Sales  Volume** | ** ** | **Sales** | ** ** | **% of Sales  Volume** | ** ** |
| ** **              | ** ** | **(GWh)**                                  | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** |
| Contracted sales        |       | 9,333                                      |       | 64.4 |   | 9,736 |   | 64.3 |   | 9,800 |   | 65.0 |   |
| Non-Contracted sales    |       | 5,148                                      |       | 35.6 |   | 5,412 |   | 35.7 |   | 5,277 |   | 35.0 |   |
| Total Electricity sales |       | 14,481                                     |       | 100 |   | 15,148 |   | 100 |   | 15,077 |   | 100 |   |

 

The following table setsforth our sales by volume to our five largest distribution customers inColombia for each of the periods indicated:

 

**MAIN CUSTOMERS INCOLOMBIA (GWh)**

 
| ** **              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **              | ** ** | **Sales**                                  | ** ** | **% of Sales** | ** ** | **Sales** | ** ** | **% of Sales** | ** ** | **Sales** | ** ** | **% of Sales** | ** ** |
| ** **              | ** ** | **(GWh)**                                  | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** |
| Distribution companies: |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Codensa                 |       | 4,860                                      |       | 52 | % | 4,413 |   | 45 | % | 3,933 |   | 40 | % |
| Cens                    |       | 273                                        |       | 3 | % | 527 |   | 5 | % | 221 |   | 2 | % |
| Electricaribe           |       | 267                                        |       | 3 | % | 510 |   | 5 | % | 341 |   | 3 | % |

 

47

----

 
| ** **                                         | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **Sales**                                  | ** ** | **% of Sales** | ** ** | **Sales** | ** ** | **% of Sales** | ** ** | **Sales** | ** ** | **% of Sales** | ** ** |
| ** **                                         | ** ** | **(GWh)**                                  | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** |
| Essa                                               |       | —                                     |       | — |   | 501 |   | 5 | % | 206 |   | 2 | % |
| Electrocosta                                       |       | 213                                        |       | 2 | % | 253 |   | 3 | % | 426 |   | 4 | % |
| Dicel                                              |       | 279                                        |       | 3 | % | — |   | — |   | 222 |   | 2 | % |
| Enertolima                                         |       | —                                     |       | — |   | — |   | — |   | 800 |   | 8 | % |
| Total sales to our largest distribution  companies |       | 5,892                                      |       | 63 | % | 6,205 |   | 64 | % | 6,149 |   | 63 | % |

 

Our most important competitors in Colombia include thefollowing state-owned companies, each with installed capacities at December,2005 as described: Empresas Públicas de Medellín, whose total net installedcapacity was 2,558 MW, Isagen, whose total installed capacity was 2,091 MW, andCorelca, whose installed capacity was 1,339 MW. We also compete with the following publicly owned companies in Colombia:EPSA, whose total installed capacity was 1,061 MW in December 2005 and Chivor, whichis owned by AESGener, whose total installed capacity was 1,000 MW in December2005.

 

**ElectricityGeneration in Colombia—Industry Structure and Regulatory Framework**

** **

The Colombian constitution provides that it is thegovernment’s duty to ensure that public services are made available in anefficient manner to everyone.  *Ley Número 142* of 1994 (“Law 142”) provides the broadregulatory framework for the provision of residential public services;including electricity, and *Ley Número 143*of 1994 (the “Colombian Electricity Act”) provides the regulatory framework forthe generation, trading, transmission and distribution of energy.

 

Law 142 establishes that the provision of electricityservices is an essential public service that may be provided by government andprivate sector entities.  Utilitycompanies are required to: (1) ensure continuous and efficient service withoutabuse of a dominant position; (2) facilitate low-income users’ access tosubsidies granted by the authorities; (3) inform users regarding efficient andsafe use of the services; (4) protect the environment; (5) allow access andinterconnection to other public service companies, their large users, or totheir services; (6) cooperate with the authorities in the event of emergency toprevent damage to the users; and (7) report the commencement of theiractivities to the appropriate regulatory commission and the *Superintendencia de Servicios Públicos Domiciliarios*(Superintendency of Public Services) (“SSP”).

 

The Colombian Electricity Act sets out the followingprinciples for the electricity industry, which are implemented in theresolutions promulgated by the *Comisión de Regulación deEnergía y Gas* (“CREG”) and other regulatory bodies governing theelectricity sector: (1) efficiency—the correct allocation and use of resourcesand the supply of electricity at minimum cost; (2) quality—compliance with thetechnical requirements established in regulations affecting the sector; (3)continuity—a continuous electricity supply without unjustified interruptions;(4) adaptability—the incorporation of modern technology and administrativesystems to promote quality and efficiency; (5) neutrality—the impartialtreatment of all electricity consumers; (6) solidarity—the provision of fundsby higher income consumers to subsidize the subsistence consumption of lowerincome consumers; and (7) equity—an adequate and non-discriminatory supply ofelectricity to all regions and sectors of the country.

 

Prior to the passage of the Colombian Electricity Act,the Colombian electricity sector was extensively vertically integrated.  The Colombian Electricity Act separatelyregulates generation, transmission, trading and distribution (the “Activities”).  Under this law, any company, domestic orforeign, may undertake any of the Activities. New companies, however, must engage exclusively in one of theActivities.  Trading can be combined witheither generation or distribution. Companies which were vertically integrated at the time the ColombianElectricity Act became effective may continue to engage in all the Activitiesin which they were engaged prior to the effectiveness of the ColombianElectricity Act but must maintain separate accounting records for eachActivity.

 

•                  TheCREG 001-2006 resolution modifies market share calculation methodology forgeneration, trading and distribution activities but eliminates the 25% marketshare limit for the distribution activity established that as of July, 2007;the market share of generators, traders have been limited as follows:

 

48

----

 

•                  agenerator may not own more than 25% of the installed generating capacity inColombia;

 

•                  atrader may not account for over 25% of the trading activity in the ColombianSIN; and

 

in order to calculatethese limits, the CREG 001-2006 resolution established the participation of agiven company is added to those of other companies that are controlled.  In addition, generators may not own more thana 25% interest in a distributor, and vice versa; however, this limitation onlyapplies to individual companies and does not preclude cross-ownership bycompanies of the same corporate group, nor by its parents, affiliates orsubsidiaries.  In 1999, CREG issuedResolution 42, which established that no generator may increase, directly orindirectly, its participation in the Generation Market pursuant to acquisitionsor mergers, if the total MW of Net Effective Capacity resulting therefromexceed the so-called “Capacity Band” as set by the CREG.  Through Resolution 5 of 2002, CREG set theCapacity Band at 4,250 MW.  The CREG042-1999 resolution also includes rules to determine the participation of acompany and its investors in the generation, distribution and tradingbusinesses.

 

The Ministry of Mines and Energy defines thegovernment’s policies for the energy sector. Other government entities which play an important role in theelectricity industry are: (1) the *Superintendencia deServicios Públicos Domiciliarios* (“SSPD”), which is in charge ofoverseeing and inspecting the companies incorporated as public servicescompanies; (2) the CREG, which is in charge of regulating the energy and gassectors; and (3) the *Unidad de PlaneaciónMinera y Energética* (Mining and Energy Planning Agency), which is incharge of planning the expansion and along with the*ComitéAsesor para el Planeamiento de la Transmisión*(“CAPT”), determinesthe expansion of the generation and transmission network, among other tasks.

 

Under the Colombian Electricity Act, the CREG isempowered to issue mandatory regulations governing the technical and commercialoperation of the sector and the setting of charges for regulatedactivities.  The CREG’s main functionsare as follows: (1) establish the conditions for the gradual deregulation ofthe electricity sector toward an open and competitive market; (2) approvecharges for the transmission and distribution networks and charges for tradingto regulated customers; (3) establish the methodology for calculating andestablishing maximum tariffs for supplying the regulated market; (4) establishthe operation’s regulations for the planning and coordination of the operationof the Colombian National Interconnected System; (5) establish technicalrequirements for the quality, reliability and security of supply; and (6) protectcustomers’ rights.

 

CREG resolutions do not require Congressionalapproval.  Law 142 of 1994 establishesthat any CREG Resolution, that gives rise to a right or obligation of anindividual utility, may be contested first through a *recurso dereposición,* an appeal filed with the CREG which makes a decision orpromulgates an administrative act, requesting reversal, modification orclarification of its decisions or Resolutions; and secondly through lawsuitsbefore administrative courts. Resolutions of a general nature may be directly contested through alawsuit before an administrative court. CREG also has the authority to resolve disputes between participants inthe electricity and gas sectors, per their request, through arbitration, whenthe dispute involves the interpretation of operational or commercial rules.

 

The generation sector is organized on a competitivebasis with generation companies selling their production on the electricitypool market in an energy pool known as the Bolsa de Energía (the “Bolsa”) atthe spot price or by long-term private contracts with certain other marketparticipants and non-regulated users at freely negotiated prices.  The Colombian SIN is the Colombianelectricity system formed by the following elements: the generation plants, theinterconnection grid, the regional and interregional transmission lines, thedistribution lines and the electrical loads of the users.  Betania and Emgesa are part of the SIN.  The spot price is the price paid by the participantin the wholesale market for energy dispatched under the direction of the CentroNacional de Despacho (“CND”).  The hourlyspot price paid for energy reflects prices offered by generators in the Bolsaand the respective supply and demand. Generators connected to the SIN also receive a capacity charge providedthey meet certain conditions established in the CREG Resolution 116 of 1996 (“Resolution116”), as amended by several other resolutions including Resolution 074 of2002.  The capacity charge is calculatedpursuant to formulas also included in such Resolutions.  Since the creation of the wholesaleelectricity market in July of 1995, relatively stable amounts of energy havebeen exchanged between generators and distribution companies, acting in theircapacity as traders.  Initially,distribution companies were required to enter into contracts to supply 100% oftheir regulated market and, although this requirement has gradually beenreduced, they have still tended to secure contracts for a large proportion oftheir regulated market.

 

49

----

 

***Dispatch and Pricing***

*** ***

The purchase and sale of electricity can take placebetween generators, distributors acting in their capacity as traders, traders(who do not generate or distribute electricity) and unregulated consumers.  There are no restrictions limiting newentrants into the market as long as the participants comply with the applicablelaws and regulations.

 

The principal function of the Bolsa is to allow forthe sale of excess energy not committed under contracts and for spot sales ofelectricity.  In the Bolsa an hourly spotprice for all units dispatched is established based on the offer price of thehighest priced generating unit dispatched for that period.  Every day the CND receives price bids fromall the generators that participate in the Bolsa.  These bids indicate the daily prices at whichthe generators are willing to supply electricity and the hourly availablecapacity for the following day.  Based onthis information, the CND following the principle known as “optimal dispatch”(which assumes an infinite transmission capacity through the network) ranks thegenerators according to their offer price, starting with the lowest bid,thereby establishing on an hourly basis the merit order in which generatorswould be dispatched in the following day to meet expected demand.  The price in the Bolsa for all generators isset by the costliest generator dispatched in each hourly period under theoptional dispatch.  This price rankingsystem is intended to ensure that national demand, increased by the totalamount of energy exported to other countries will be satisfied by the lowestcost combination of available generating units in the country.  During 2003, international short-term electricitytransactions were regulated through Resolution CREG 004 and some other amendingresolutions, which became effective when trade with Ecuador began.  Also, the CND performs the “planned dispatch,”which takes into consideration the limitations of the network as well as everyother condition necessary to attend energy demands expected for the followingday, in a secure, reliable and cost-efficient manner.  The planned dispatch is revised continuouslyby the CND in response to any changes affecting the system (e.g., demand,actual plant availability, system restrictions, etc.) that may take placethroughout the day.

 

Differences among real dispatch and “optimal dispatch”give rise to what are known as “restrictions,” which are settled for eachgenerator in the following way: restricted generators (those whose realgeneration is lower than optimal dispatch) are charged with the average of themarket price and their offer prices; and out-of-merit generators (those whosereal generation is greater than optimal dispatch) are credited with thedifference, also appraised according to regulated prices (CREG 034-2001 andothers).  The net value of theserestrictions are assigned proportionally to all the traders within theColombian SIN, according to their demands of energy.  The attacks by guerrillas on the transmissioninfrastructure gave rise to a significant increase in restrictions, which inturn gave rise to claims from users given the subsequent increase of tariffs.  This situation forced CREG to issue Resolution34 (2001) and some other amending resolutions, in order to intervene in thesettlement of the restrictions, in such a manner that for the restrictedgenerators, the difference is appraised with the average of the offer price andthe spot price.  The out-of-meritgenerators have a maximum cap on the recognized price, in accordance withpre-established values.  This Resolution,which is still in force, despite the fact that it had been announced as atemporary measure, has been challenged, and in certain cases, has resulted inlegal proceedings initiated by the generators, who consider that the recognizedprices do not cover the costs associated with these restrictions.

 

The dominance of hydroelectric generation and themarked seasonal variations in Colombia’s hydrology result in a high degree ofprice volatility in the Bolsa.  In orderto enhance predictability and mitigate the volatility of spot sale prices, CREGintroduced a new firm capacity charge pursuant to Resolution 116 (the “CapacityCharge”), effective as of December 1, 1997, amended by Resolution 113 of 1998,Resolutions 47 and 59 of 1999, Resolutions 077, 078, 081, 090 and 111, of 2000,Resolution 001 of 2001 and Resolution 074 of 2002.  The Capacity Charge is a fixed monthly chargeintended to be equivalent to the capital costs of an open-cycle gasturbine.  The Capacity Charge remuneratesgenerators for the firm capacity made available to the Colombian SIN in periodsof critical hydrology.  Generatorsreceive the Capacity Charge payment regardless of actual plant dispatch,provided that their declared availability exceeds certain limits and that theymeet other conditions set forth in Resolution 116 as amended.  The Capacity Charge provides generators witha source of fixed revenue which is dependent primarily on the generator’s ownfirm energy.  The CND can verify agenerator’s declared availability and the SSPD can impose sanctions if theactual availability is lower than the declared availability.  If a generator’s availability is less thanthe minimum limit, the generator does not receive the total amount of theCapacity Charge.

 

If a generator’s availability is less than the minimumlimit during the dry season, between December 1 and April 30 of each year, thegenerator only receives the Capacity Charge equivalent to its actualavailability.  Also, the

 

50

----

 

minimum limit for the rainyseason (between May 1 and November 30 of each year) is determined by the lowestvalue between the minimum limit and the average actual availability during thedry season.

 

In particular, Resolution 111 (2000) modified thecalculation of the Capacity Charge for generation companies, shifting thebalance in favor of thermal generators over hydroelectric generators.  The Capacity Charge of a given power plant iscalculated on the basis of the firm energy that could be supplied during a24-month period of hypothetical drought assuming each month the minimumhydrological conditions that prevailed during different “El Niño” phenomenathat have been recorded statistically.  Anew proposal for the calculation of the Capacity Charge for generationcompanies is currently being discussed.

 

In March 2003, the Colombian pool market started theTIE with Ecuador and exported 1,129 GWh and imported 67 GWh.  During 2005, Colombia exported 1,757 GWh andimported 16 GWh.  Please refer to “Item4. Information on the Company—B. Business Overview—Operations in Colombia” formore information.

 

***Transmission***

*** ***

Transmission companies (defined as those that operatenetworks of voltages of at least 220kV, which in turn make up the NationalTransmission System, or NTS) are required to provide third-party access to thetransmission system under equal conditions and are authorized to collect a tarifffor transmission services.  If theparties do not agree upon the conditions of such access, the CREG is entitledto impose an easement of access.  Thetransmission tariff that must be paid by generators, distribution companies andtraders is composed of:

 

•                  aconnection charge that underwrites the cost of operating the equipment thatlinks the user to the transmission system, which is not charged if thegenerator is the owner of the connecting equipment; and

 

•                  ausage charge, applicable only to traders.

 

The NTS regulates income for transmission companies bymeans of a guaranteed annual fixed income, subject to the compliance of certainminimum availability, which is determined by the new replacement value of thenetworks and equipment existing as of January 1, 2000, and in the case of newprojects, by the resulting value of the bidding processes awarded for theexpansion of the NTS.  Such value hasbeen allocated 100% among the traders of the NTS in proportion to the energydemand registered by all of its clients.

 

The expansion of the NTS is carried out according tomodel expansion plans designed by *Unidad PlaneaciónMinero-Energética* (“UPME”) and pursuant to bidding processes openedto existing transmission companies and new companies, which are handled by theMinistry of Mines and Energy following the guidelines set forth in CREGResolution 51 of 1998.  According to suchResolution, the construction, operation and maintenance of new projects isawarded to the Company that demands the lowest present value of cash flowsneeded for carrying out the project. CREG has enacted subsequent resolutions which modify and replace CREG051 of 1998 by improving the plan of expansion of STN but conserving the sameconceptual framework.

 

***Distribution***

*** ***

Distribution is defined as the operation of localnetworks at below 220 kV.  Any user mayhave access to a distribution network provided the user pays a connectioncharge.  The CREG regulates distributionprices and operations.  Distributionprices should permit distribution companies to recover their reasonable costs,including operating, maintenance and capital costs.  The use of the system charges (“DUOS charges”)for each company is approved by CREG and varies depending on the voltage level.

 

CREG must calculate DUOS charges for eachcompany.  By means of Resolution 082 from2002, the CREG fixed the new distribution charges methodology replacing those containedin Resolution 99 of 1997.  Thedistribution charges are calculated based on the replacement cost of thedistribution assets prevailing at the moment the charges are being calculated(the calculation method assumes that the marginal cost for new projects islower than or equal to the approved average cost, and allows any excess overthe average cost to be charged to the users interested in projects that do notmeet such condition) and an assumed opportunity cost of capital, as well asoperation and maintenance costs.

 

51

----

 

***Trading***

*** ***

Trading is the direct resale to end users ofelectricity purchased in the wholesale market and may be conducted bygenerators, distributors or independent agents which must comply with therequirements of CREG.  The parties freelyagree upon trading prices for deregulated users.  Trading to regulated users is subject to a “regulatedfreedom regime” under which the tariffs are set by each trader using tariffoptions based on a formula established by CREG in Resolution 31 1997;currently, a new methodology is being developed by the CREG.  Tariffs are determined pursuant to acombination of:

 

•                  generalcost formulas given by CREG; and

 

•                  individualtrading costs approved by CREG for each trader.

 

The approved costs are maximum costs.  Thus the traders may set tariffs applyinglower costs supported by economic reasons, duly evidenced.  Tariffs include, among others, the costs forthe purchase of electricity by the trader, transmission charges, distributioncharges and a margin to cover the risks of the activity and the return on theinvestment.

 

The distribution market is divided into regulated andunregulated customer markets.  Customersin the unregulated market are free to contract electricity supplies directlyfrom a generator or distributor, acting in their capacities as traders, or froma pure trader.  The unregulated customermarket consists of customers with a peak demand of more than 0.1 MW or aminimum monthly consumption of 55 MWh, which corresponds to approximately 3,500large industrial and commercial customers and represents about 32% of thesupply market.

 

Because CREG did not decide on the new tariff formulato be applied in the next tariff period, the current methodology remained ineffect for 2005.  It is expected that thenew tariff formula, the regulated margin for trading activities and theconditions of competition of the industry will be determined by the CREG during2006.

 

It is expected that certain elements in retail tradingregulation which grant artificial competitive advantages to independent traderswill be corrected by the new retail trading scheme.  The bulk of National Development Planregulation regarding the electric retail business is published in decree 3734,published by the Ministry of Mines in December 2003.  Under this decree, independent traders areforced to have the same market composition, in terms of average energyconsumption per customer, as the established trading and distributioncompany.  This decree also imposes anobligation to recognize costs associated with being the last resortsupplier.  However, the contents of thisDecree have not been fully enforced yet. At a wholesale level, the new long-term energy supply scheme – SEC “SistemaElectrónico de Comercialización”—is expected to become fully operative in 2006.

 

***Environmental Regulation***

*** ***

Law No. 99 of 1993 provides the legal framework onenvironmental regulation and, among other things, created the Ministry of theEnvironment as the authority for establishing environmental policies, with aspecific focus on the definition, issuance and execution of policies andregulations seeking the recuperation, conservation, protection, organization,administration and use of renewable resources. Thus, the use of natural resources or any impact to them as a result ofany activity or project will require the issuance of permits and environmentallicenses or the establishment of environmental management plans.  The law places particular attention onenvironmental impact prevention by entities in the energy sector.  Any such entity planning to undertakeprojects or activities relating to generation, interconnection, transmission ordistribution of electricity which may result in environmental deterioration,must first obtain an environmental license.

 

Since 1993, Colombia has experienced a significantexpansion in its environmental regulations as a result of Law No. 99, whichrequires generators to contribute to the conservation of the environment bymeans of a payment for the use of electricity generation.  Hydraulic plants with total installed nominalcapacity above 10,000 kilowatts must pay 6% of the sales of energy; in the caseof thermoelectric plants the percentage is 4%. This payment is made to the municipalities and environmentalcorporations where facilities are located.

 

52

----

 

***Inspection and Control***

*** ***

According to the National Constitution and the PublicUtilities Law, the Superintendency of Public Utilities exercises supervision ofpublic services companies involved in the aforementioned electricityactivities.  In 2003, the Superintendencyof Public Utilities implemented a central information system in order toconsolidate all the information of public utilities for both control andinformation purposes.  In early 2006, theSuperintendence of Public Utilities issued a resolution modifying the effectsof inflation in the asset’s book value of public utilities.  It is not yet possible to estimate the impactof such resolution on our business.

 

**Operations inBrazil**

** **

Operating Income from the Company’s business in Brazilrepresented 3.3%, 4.1%, and 3.7% for 2003, 2004 and 2005 of our total operatingincome.  Operating revenues and expensesfor the three years are shown in the following table:

 

**TOTAL OPERATINGINCOME FROM OPERATIONS IN BRAZIL**

 
| ** **         | ** ** | **Year ended December 31,**                  | ** ** |
|--------------------|------------|-------------------------------------------------------------|------------|
| ** **         | ** ** | **2003**                                                    | ** ** | **2004** | ** ** | **2005****(1)** | ** ** |
| ** **         | ** ** | **(in millions of constant Ch$ )** | ** ** |
| Operating Revenues |       | 32,698                                                      |       | 43,518 |   | 41,795 |   |
| Operating Expenses |       | 26,776                                                      |       | 26,885 |   | 19,618 |   |
| Operating Income   |       | 3,884                                                       |       | 14,829 |   | 18,570 |   |

 

----

(1)          Operatingresults from Brazil for 2005 include only 9 months of Cachoeira Dourada’sfinancials.

 

For details on the variations of yearly monetaryfigures, please see “Item 5.  Operatingand Financial Review and Prospects.”

 

Endesa Chile participated in the Brazilian electricitymarket through its subsidiary Cachoeira Dourada through September 2005.  Subsequent to September 2005, Endesa Chile’sparticipation in the Brazilian electricity market is accounted for through itsminority share of Endesa Brasil, which consolidates operations ofgeneration companies Endesa Fortaleza and Cachoeira Dourada; CIEN, whichcommercializes two transmission lines between Argentina and Brazil; adistribution company, Ampla, which is the second largest electricitydistribution company in the State of Rio de Janiero; and Coelce, which is thesole electricity distributor in the State of Ceará.  For more details on Endesa Brasil see “Item4. Information on the Company—C. Organizational Structure”.

 

Installed capacity as of December 31, 2003, 2004 and2005 are shown in the following table.

 

**INSTALLEDGENERATION CAPACITY IN BRAZIL (MW)(1)**

 
| ** **        | ** ** | **(MW)** | ** ** |
|-------------------|------------|----------|------------|
| ** **        | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| Cachoeira Dourada |       | 658      |       | 658 |   | — |   |
| Total             |       | 658      |       | 658 |   | — |   |

 

----

(1)          Totalinstalled capacity defined as the maximum MW capacity of generation units,under specific technical conditions and characteristics.

 

Our physical generation from January to September 2005was 2,645 GWh, representing a 10.4 % increase as compared to the same period in2004.  Cachoeira Dourada’s generationdepends on rainfall in the region in which it operates.  Hydrological conditions were favorable toCachoeira Dourada’s electricity generation during January-September 2005,increasing the plant’s average percentage of total installed capacity used fromapproximately 56% in 2004 to 62% in 2005.

 

53

----

 

The following table sets forth the physical energyproduction and purchases of Cachoeira Dourada:

 

**PHYSICALPRODUCTION AND PURCHASES IN BRAZIL (GWh)**

 
| ** **             | ** ** | **2003-2004 Year ended December 31; 2005 January—September** | ** ** |
|------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **             | ** ** | **2003**                                                                                        | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(GWh)**                                                                                       | ** ** | **%** | ** ** | **(GWh)** | ** ** | **%** | ** ** | **(GWh)** | ** ** | **%** | ** ** |
| Electricity Production |       | 3,024.3                                                                                         |       | 80.2 |   | 3,262.2 |   | 83.6 |   | 2,644.8 |   | 91.3 |   |
| Electricity Purchases  |       | 745.3                                                                                           |       | 19.8 |   | 639.8 |   | 16.4 |   | 252.7 |   | 8.7 |   |
| Total(1)               |       | 3,769.6                                                                                         |       | 100.0 |   | 3,902.0 |   | 100.0 |   | 2,897.5 |   | 100.0 |   |

 

----

(1)          Energyproduction plus energy purchases may differ from electricity sales due totransmission losses.

 

Cachoeira Dourada has a long-term take-or-paycontract, which was executed in September 1997 when we acquired the concessionfor Cachoeira Dourada (“CDSA”) with *Companhia Elétrica deEstado de Goiás S.A.*(“CELG”), a regional state-owneddistribution company.  The contract has aterm of 15 years.  During the first fiveyears, CELG purchased all of the contracted capacity of Cachoeira Dourada (415MW).  That amount was reduced by 10% (42MW) per year beginning in September of the sixth year.  As a result, physical sales to CELG declined11% in 2004 as compared to 2003.  Theelectricity generated monthly in excess of CDSA’s contractual commitment toCELG is sold to third parties, including the pool market.

 

Electricity demand in Brazil increased 3.9 during2005, 5.0% during 2004 and 5.3% during 2003.

 

The distribution of physical sales for CachoeiraDourada’s, in terms of customer segment, is shown in the following table:

 

**PHYSICAL SALES PERCUSTOMER SEGMENT IN BRAZIL (GWh)**

 
| ** **           | ** ** | **2003-2004 Year ended December 31; 2005 January—September** | ** ** |
|----------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **           | ** ** | **2003**                                                                                        | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **           | ** ** | **Sales**                                                                                       | ** ** | **% of Sales  Volume** | ** ** | **Sales** | ** ** | **% of Sales  Volume** | ** ** | **Sales** | ** ** | **% of Sales  Volume** | ** ** |
| ** **           | ** ** | **(GWh)**                                                                                       | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** |
| Contracted sales     |       | 3,428.0                                                                                         |       | 90.9 |   | 3,398.0 |   | 87.1 |   | 2,592.9 |   | 89.5 |   |
| Non-Contracted sales |       | 342.0                                                                                           |       | 9.1 |   | 504.0 |   | 12.9 |   | 304.6 |   | 10.5 |   |
| Total                |       | 3,770.0                                                                                         |       | 100.0 |   | 3,902.0 |   | 100.0 |   | 2,897.5 |   | 100.0 |   |

 

Until September 2005, we operated in Brazil throughCIEN in the trading and transportation of electricity between Argentina andBrazil.  See “Item 4. Information on theCompany—C. Organizational Structure” for details.  Through CIEN, Endesa Chile participated in a2,000 MW interconnection project corresponding to the transmission line betweenArgentina and Brazil.  CIEN, through itssubsidiaries CTM and TESA, owns and operates the Argentine side of bothlines.  As of October 1, 2005 thisbusiness has been accounted for in Endesa Chile through its participation inits newly created related company Endesa Brasil (See “Item 4. Informationon the Company—A. History and Development of the Company” for details).

 

CIEN has executed five energy sales agreements to sellenergy in Brazil with the following customers: Furnas CentraisElétricas S.A. (“FURNAS”); *Centrais Geradoras do Suldo Brasil S.A.*(“GERASUL”); *Companhia Paranaense deEnergia - COPEL* (“Copel”), AMPLA and Samarco, the latter until April2005.  The contracts are at fixedreal-denominated prices, indexed in part to the U.S. dollar.  The contracts with GERASUL and FURNAS are not“take or pay” as to the amount of energy to be purchased but do require thesupply of 1,000 MW of capacity at all times. Similarly, in order to satisfy its commitments with Brazilian customers,CIEN maintains contracts with Argentine generators, including our subsidiary inArgentina, Endesa Costanera.

 

Beginning in March 2005, the generation constraints inArgentina affected the operations of the interconnection, resulting in aspecial export-related agreement between the Brazilian and Argentineauthorities dated December 9,

 

54

----

 

2005.  Based on that agreement the contractsassociated with the interconnections are being restructured.  For additional information on this agreement,see “Item 4. Information on the Company—B. Business Overview—Operations inArgentina.”

 

**ElectricityGeneration in Brazil—Industry Structure and Regulatory Framework**

** **

Brazil’s electricity industry is organized into onelarge interconnected electricity system, which is known as the SistemaInterconectado Nacional (the “Brazilian SIN”), which is comprised ofelectricity companies in the southern, southeast, central-western, northeastand other parts of the northern regions of Brazil, and several other small,isolated systems.

 

Generation, transmission, distribution and supplyactivities are legally separated in Brazil. Non-regulated customers in Brazil are currently those customers whodemand 3,000 kWh or more annually, though this threshold is under discussion.

 

Under the current regulatory structure, theelectricity industry in Brazil is comprehensively regulated by the União(Union), acting through the Ministry of Mines and Energy, or MME, which has exclusiveauthority over the electricity sector through its concessionaire and regulatorypowers.  Regulatory policy for the sectoris implemented by the National Agency of Electric Energy, or ANEEL, establishedpursuant to Law No. 9.427/96.  ANEEL isresponsible on behalf of União for, among other things:

 

•                  grantingand supervising concessions on behalf of the União for electricity generation,transmission, trading and distribution, including approval of applications forthe setting of tariff rates;

 

•                  supervisingand auditing the concessionaire companies;

 

•                  issuingregulations for the electricity sector;

 

•                  grantingdecisions in order to solve, as an administrative matter, the differences amongconcessionaires, independent producers, consumers and other industryparticipants;

 

•                  establishingthe criteria to calculate transmission prices;

 

•                  imposingcontractual and regulatory penalties;

 

•                  implementingpublic policies (such as low-income programs) pointed out by the FederalGovernment;

 

•                  establishingthe tariff rate for consumers;

 

•                  managingthe process of tariff adjustments;

 

•                  managingthe bidding process for the wholesale of energy;

 

•                  managingthe concession contracts; and

 

•                  terminatinga concession, in those cases contemplated in the law and/or a concessionagreement.

 

In addition, there is the ONS—*OperadorNacional do Sistema Elétrico*, which is a nonprofit private entity inwhich the concession holders and the unregulated consumers participate asmembers with voting rights and the Ministry of Mines and Energy and the boardof consumers participate as members with no voting rights.

 

The ONS is responsible for:

 

•                  theplanning and coordination of the operations and dispatch of electricity inorder to optimize the electricity produced in the interconnected systems;

 

•                  thesupervision and coordination of the operation centers of the electricitysystems; and

 

55

----

 

•                  thedefinition of rules for the transmission of energy in the interconnectedsystems.

 

Law No. 8,631, effective since 1993, fundamentallychanged the regulatory structure governing electricity rates in Brazil.  The new system abolished utilities’guaranteed annual real rate of return (“Guaranteed Return”) and the system ofuniform electricity rates throughout the country.  The reforms called for automatic inflationtariff adjustments according to a complex multivariable parametric formula. LawNo. 8,631 established that electricity tariffs were expected to reflectoperating costs of each company plus a certain return on capital, which is nota predefined return, but instead a financial/economic equilibrium.

 

In December 1994, the Brazilian government introducedthe “Real Plan.” The Real Plan, specifically in the electricity industry,superseded previous rate-setting laws. Under the Real Plan, rate increases for public utilities due toinflation are no longer granted automatically. In an attempt to curtail inflation, the “Real Plan” prohibited priceadjustments for periods of less than one year in any and all contracts.  Under the Real Plan, prices are reviewed andcorrected on an annual basis.

 

***Deregulation***

*** ***

Brazil’s concessions regulations were replaced by twostatutes enacted in 1995: Law No. 8,987 of February 13, 1995 (the “ConcessionsLaw”) and Law No. 9,074 of July 7, 1995 (the “Power Sector Law”).  The Concessions Law and the Power Sector Lawgave rise to substantial changes in both the regulations for public serviceconcessions and the rule for renewal and approval of concessions.  The objectives of these laws with respect tothe electricity sector laws include the injection of competition into what hadbeen a government monopoly, the infusion of private capital into the sector,the creation of incentives to complete projects on which work was suspended ordelayed due to financial difficulties, and the laying of the groundwork forprivatizations in the sector.

 

***Independent Power Producers and Self-Producers***

*** ***

The Power Sector Law also introduced the concept ofthe independent power producers, or IPP, as a further factor in opening up theelectricity sector to private investment. The Power Sector Law provides for the formation of consortia to generatepower for public utilities, for use by consortium members, for independentpower production or for any one or more of these, in each case governed byapplicable rules.  Self-producers(producers who generate power primarily for their own use) may:

 

•                  contributeor exchange energy with other self-producers within a consortium;

 

•                  sellexcess energy to the local distribution concessionaire; or

 

•                  exchangeenergy with the local distribution concessionaire to allow for consumption byindustrial plants owned by the self-producer and located somewhere other thanin the area of generation.

 

Decree No. 2,003 (of 1996) sets forth the regulatoryframework for IPPs and self-producers. Pursuant to such decree, the development of hydroelectric power plantsby an IPP or a self-producer requires a concession (awarded following a biddingprocess) only when the project will generate power in excess of 1 MW in thecase of an IPP and 10 MW in the case of a self-producer.  In all other cases, including development ofthermoelectric plants, the IPP or self-producer is only required to obtainauthorization from, or to register with, ANEEL. Decree No. 2,003 also provides that concessions and authorizationsgranted thereunder have terms of 35 and 30 years, respectively, with thepossibility of extensions for periods equal to the initial terms.

 

As part of the former federal government’s attempt toabolish the monopolies enjoyed by most power companies, the Concessions Lawalso provides that, upon receiving a concession, IPPs, self-producers,suppliers and consumers will be permitted access to the distribution andtransmission systems of all concessionaires, provided that the concessionairesare reimbursed for their related costs. The basis on which such costs will be reimbursed has been determined bythe ANEEL.

 

Pursuant to Law No. 10,433, dated April 24, 2002, theWholesale Energy Market structure changed to be closely regulated and monitoredby ANEEL.  As a result of Law No. 10,433,ANEEL will be responsible for setting Wholesale Energy Market governance rules.  Under the former regime, such rules wereprimarily established by the

 

56

----

 

market players, subject only toANEEL’s ratification.  This restructuringseeks to reorganize the electricity system model to allow for continuedexternal investment.  The Law No.10,848/04 has maintained this restructuring. Nevertheless, this law has revoked Law No. 10,433/02 and replaced theWholesale of Energy Market (MAE) with the Chamber of Commercialization ofEnergy – CCEE, which is now responsible for the activities of MAE.  According to the new model, ANEEL continuesto be responsible for setting governance rules for CCEE (ex-MAE).

 

On April 26, 2002, former President Cardoso issuedanother relevant rule to the sector (Law No. 10,438), with the objective ofrecovering revenues lost due to the rationing decree which occurred betweenJune 2001 and February 2002, expanding the emergency energy supply andincreasing the alternative energy sources and producing modifications of someimportant rules to the electricity sector.

 

Law 10,438 established a new criterion for thereclassifying of low-income residential customers and the goals for the energysupply expansion program.  The eventualhigher cost resulting from the application of the new reclassification criteriawill be financed by funds originated from the federal public energy auctionsand the RGR account, as a tariff subsidy, without affecting distributioncompanies.  The financing of the energysupply expansion program, not taken into account in the ordinary tariffrevision, will be provided by the government and other sources of financingwith the recognition that the economic financial equilibrium of the companiescannot be altered.

 

During its first year in office, the government ofPresident Luiz Inácio Lula da Silva recognized that Cardoso’s regulatory regimehad not been successful in stimulating growth in the electricity generationindustry or with respect to the maintenance of low tariffs.  As a result, in February 2003, the Ministryof Mines and Energy created a committee to work on institutional reform.  The committee published a “Proposal of anInstitutional Model for the Electricity Sector.” The basic guidelines or goalsof this proposal, which were approved by the CNPE (Resolution No. 5, July 21,2003), consist of:

 

•                  maintainingthe public service concept for the production and distribution of theelectricity to consumers within our concession area;

 

•                  restructuringthe system planning;

 

•                  transparencyin the auction and bidding process for public projects;

 

•                  mitigatingthe systemic risks;

 

•                  maintainingcentralized and coordinated operations of the Brazilian energy system;

 

•                  grantinguniversal use and access to electricity services throughout Brazil; and

 

•                  modifyingthe bidding process of public service concessions.

 

*Contract Level Rule*

* *

Following the enactment of Law No. 10,848/04 in 2004,the demand from distribution companies must now be contracted completely.  Previously, only 95% of the energy sold bythe MAE participants had to be guaranteed from generation facilities.

 

*Intercompany ContractsApproval*

* *

ANEEL approval is required for related companycontracts.  The contracts betweencompanies of the Enersis Group, Ampla-CIEN and Coelce-CIEN were approved byANEEL.

 

***Structure of the New Electricity Sector***

*** ***

Thus, as expected, the power industry was reviewed byLuiz Inácio Lula da Silva’s administration and it was subject to significantchanges.  The federal Laws No. 10,847 and10,848 of March 2004 established a new model for the Brazilian electricitysector.  The new model seeks to providecheaper tariffs for consumers and guarantee the expansion of the system, withthe EPE (Power Research Company), a governmental body, responsible for the

 

57

----

 

planning of generation andtransmission activities.  This new modelhas defined two contracting environments: the free contracting and theregulated environment.

 

In the free contracting environment, the conditionsfor purchasing energy are negotiable between suppliers and theircustomers.  In relation to the regulatedenvironment, where energy distributors operate, the new model has introducedsignificant changes.  Whereas the oldmodel allowed self-dealing and allowed distributors to conduct their ownauctions for their energy purchases, under the new model the purchase of energyin the regulated environment must be executed pursuant to the bidding processcoordinated by ANEEL.

 

The bidding process coordinated by ANEEL is divided intotwo parts: one part relates to existing energy and the other part relates toenergy to be generated in the future. The contracts resulting from the bidding process for existing energyhave a term of five to fifteen years. There was an auction under this model on December 7, 2004 in relation tocontracts beginning in 2005-2007, and another auction in March 2005 forcontracts which will begin in 2008-2009. One more auction was necessary in October 2005 for the contractsbeginning in 2009.

 

The bidding process for the new energy is scheduled tooccur within five years and will occur three years prior to the beginning ofthe contract.  Such contracts will have aterm of fifteen to thirty years.  The newenergy will be contracted according to estimated demand.  The first auction for new energy occurred inDecember 2005 for contracts beginning in 2008 through 2010.

 

Another change imposed on the electricity sector isthe separation of the bidding process for “existing power” and “new projectpower”.  Power plants that were inexistence prior to 2000 are considered “existent power” and those that weredeveloped after 2000 are considered “new power project”.  Cachoeira Dourada has been consideredexisting power.  The government believesthat existing power plants are able to provide power at lower prices, andtherefore it should give priority in the bidding process to power generated bynew project power companies.  Under thenew electricity sector, this priority is in the form of more favorablecontractual terms.  For example, agenerator considered a new hydroelectric project power is guaranteed a powerpurchase agreement with a thirty-year term if it wins the bidding process,while an existent power is not necessarily even guaranteed participation in thebidding process.  Additionally, the newmodel forces the creation of new sector agents, like *Empresa dePesquisa Energética*(Power Research Company), or EPE, bound toMinistry of Mines and Energy.  EPE hasthe objective of researching the Brazilian Power Sector Planning.  Other new sector agents are the *Câmara de Comercialização de Energia Elétrica* (PowerCommercialization Chamber), or CCEE, which is the MAE’s substitute in contractadministration and monitoring contractual warranties and *Comitê deMonitoramento do Setor Elétrico* (Monitoring Committee of theElectricity Sector) or CMSE, which monitors and evaluates the safety andsecurity in the energy supply industry.

 

Moreover, the new model has established the separationof the sector activities by forbidding distribution companies to participate ingeneration and transmission activities and in other companies.

 

Finally, the contracts in effect at the time of theenactment of the law will be respected, but amendments changing term, price andquantities to the mentioned contracts are forbidden.

 

***Environmental Regulation***

*** ***

The Brazilian Constitution gives both the federalgovernment and state governments power to enact laws designed to protect theenvironment and to issue regulations under such laws.  While the federal government has the power topromulgate environmental regulations, state governments have the power to enactmore stringent environmental regulations. Most of the environmental regulations in Brazil are thus at the stateand local level rather than at the level of the federal government.

 

On July 16, 2004 Cachoeira Dourada obtained itsnecessary environmental permit (*licença de operação*No 401/2004), valid for four years, when it must be renewed.

 

In Brazil, hydroelectric generation companies arerequired to obtain the use of water concessions and environmental approvals,and thermal electric generation, transmission and distribution companies arerequired to obtain environmental approvals from ANEEL and the environmentalregulatory authorities.

 

58

----

 

***Recent Changes in the Tax Law***

 

Recent tax changes may affect results of Brazilianoperations.  On December 29, 2003 theFederal Government issued the Law No. 10,833/03, which establishes thenon-cumulative COFINS, determining a tax credit right for some companies andincreasing the COFINS’s rate from 3% to 7.6%. On November 8, 2004 the Federal Receipt issued the Normative InstructionNo. 468 which clarifies the concept of predetermined price in long-termagreements executed before October 31, 2003. This new concept interpretation changes the previous scenario and CIENrevenues arising from long-term agreements executed before October 31, 2003will now be impacted by this new legal framework.  Cachoeira Dourada is not affected by this newtax regime, since Cachoeira Dourada is subject to the presumed profit regime.

 

Another relevant change in tax legislation was Law No.10,865/04 (conversion of Provisional Measure 164/04), which creates a tax to beapplied to imports of movable assets, the “Imports PIS/COFINS”, effective as ofMay 2004.  This new rule follows thegeneral terms and conditions of Law No. 10,833/03 and also foresees thepossibility of a tax credit.  The taxrate for “Imports PIS/COFINS” is 9.25% (7.6% of COFINS and 1.65% of PIS).  Cachoeira Dourada is not involved in theimport of goods and services and therefore is not subject to this taxregime.  However, CIEN’s main activity isthe import of electricity from Argentina and therefore it could be affected bythis new legislation.  We cannotdetermine at this time whether CIEN will be affected by “Imports PIS/COFINS”,since CIEN’s import activity is very specific and unique.  A group of electricity import companiesintends to propose changes to the legislation in order to clarify theapplicability of Law No. 10.865/04 to import operations such as those conductedby CIEN.

 

**Operations in Peru**

 

Operating income from our business in Peru represented12.1%, 11.9%, and 10.5% of our operating income for the years 2003, 2004 and2005, respectively.  Operating revenuesand expenses for the three years are shown in the following table:

 

**TOTAL OPERATINGINCOME FROM OPERATIONS IN PERU**

 
| ** **         | ** ** | **Year Ended December 31,**                    | ** ** |
|--------------------|------------|---------------------------------------------------------------|------------|
| ** **         | ** ** | **2003**                                                      | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **         | ** ** | ***(in millions of constant Ch$ )*** | ** ** |
| Operating Revenues |       | 118,655                                                       |       | 127,817 |   | 117,663 |   |
| Operating Expenses |       | 45,701                                                        |       | 66,075 |   | 55,405 |   |
| Operating Income   |       | 65,098                                                        |       | 54,035 |   | 53,823 |   |

 

For details on the variations of yearly monetaryfigures, please see “Item 5.  Operatingand Financial Review and Prospects.”

 

Through our subsidiary Edegel, we operate a total ofeight generation plants in Peru, with a total installed capacity as of December2005 of 968 MW.  Edegel owns sevenhydroelectric power plants, with a total installed capacity of approximately739 MW, two of which are located 280 kilometers from Lima and five of which arelocated at an average distance of 50 kilometers from Lima.  The company has one thermal plant located inthe city of Lima, which represents the remaining 229 MW of total installedcapacity.

 

Our hydroelectric and thermal generation plants inPeru represent 22% of the country’s total electricity generation capacityaccording to the information reported in December 2005 by the Osinerg(Organismo Supervisor de la Inversión en Energía).

 

The following chart sets forth the installed capacityof Edegel, our Peruvian subsidiary:

 

**INSTALLED CAPACITY PER SUBSIDIARY IN PERU (MW)(1)**

 

59

----

 
| ** **                  | ** ** | **(MW)** | ** ** | ** ** | ** ** |
|-----------------------------|------------|----------|------------|------------|------------|
| ** **                  | ** ** | **2003** | ** ** | **2004**   | ** ** | **2005** | ** ** |
| **Edegel S.A.**        |       |     |       |       |       |   |   |
| Huinco (Hydroelectric)      |       | 247      |       | 247        |       | 247 |   |
| Matucana (Hydroelectric)    |       | 129      |       | 129        |       | 129 |   |
| Callahuanca (Hydroelectric) |       | 75       |       | 75         |       | 75 |   |
| Moyopampa (Hydroelectric)   |       | 65       |       | 65         |       | 65 |   |
| Huampani (Hydroelectric)    |       | 30       |       | 30         |       | 30 |   |
| Yanango (Hydroelectric)     |       | 43       |       | 43         |       | 43 |   |
| Chimay (Hydroelectric)      |       | 151      |       | 151        |       | 151 |   |
| Santa Rosa (Thermal)        |       | 228      |       | 228        |       | 229 |   |
| Total                       |       | 967      |       | 967        |       | 968 |   |

 

----

(1)  Theinstalled capacity figures relate to the recognition of effective capacity,updated and approved by the *Comité de OperaciónEconómica del Sistema*, or COES, Peru, consistent with installedcapacity defined as the maximum MW capacity of generation units, under specifictechnical conditions and characteristics.

 

Ourelectricity generation in Peru reached 4,516 GWh in 2005, 9% more than theelectricity generation of 4,136 GWh in 2004, and 5% more than the 4,287 GWh in2003. Our generation market share was approximately 20% of total electricityproduction in Peru in 2005, approximately 20% for 2004, and 22% for 2003.

 

**ELECTRICITYGENERATION IN PERU (GWh)(1)**

 
| ** **       | ** ** | **(GWh)** | ** ** | ** ** | ** ** |
|------------------|------------|-----------|------------|------------|------------|
| ** **       | ** ** | **2003**  | ** ** | **2004**   | ** ** | **2005** | ** ** |
| Edegel S.A. |       | 4,287     |       | 4,136      |       | 4,516 |   |
| Total            |       | 4,287     |       | 4,136      |       | 4,516 |   |

 

----

(1)          Generationminus power plant own consumption and technical losses.

 

Hydrologicalgeneration represented 90.7% of Edegel’s total production in 2005. The portionof electricity supplied by Edegel’s own generation was 94.8% of total physicalsales, requiring only a small amount of purchases to satisfy contractualobligations to customers.

 

SantaRosa’s TG7 unit was converted to natural gas in 2005. For the supply of gas,Edegel signed a flexible gas contract with Camisea until the year 2009 to arate fixed in U.S. dollars and indexed according to a fuel basket. Additionally,contracts of transport and distribution for the same period were signed.

 

Thefollowing table sets forth the electricity generation and purchases for Edegelover the past three years:

 

**PHYSICALPRODUCTION AND PURCHASES IN PERU (GWh)**

 
| ** **             | ** ** | **Year ended December 31,** | ** ** |
|------------------------|------------|--------------------------------------------|------------|
| ** **             | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(GWh)**                                  | ** ** | **%** | ** ** | **(GWh)** | ** ** | **%** | ** ** | **(GWh)** | ** ** | **%** | ** ** |
| Electricity Production |       | 4,287                                      |       | 95.8 |   | 4,136 |   | 94.5 |   | 4,516 |   | 94.8 |   |
| Electricity Purchases  |       | 189                                        |       | 4.2 |   | 239 |   | 5.5 |   | 246 |   | 5.2 |   |
| Total(1)               |       | 4,476                                      |       | 100.0 |   | 4,375 |   | 100.0 |   | 4,762 |   | 100.0 |   |

 

----

(1)          TotalGWh production plus purchases differs from GWh sales due to transmissionlosses, given that own power plant consumption and technical losses havealready been deducted.

 

InPeru there is only one interconnected system, *SistemaElectrico Interconectado Nacional*, or the SEIN. Electricitygeneration in the SEIN increased 5.0% during 2005 when compared to 2004,reaching a total yearly

 

60

----

 

generationof 23,001 GWh. Increased demand in Peru is partially a consequence of largerelectricity demand by the mining industry whose growth in electricity demandhas been driven by increasing copper and gold production due to higherinternational prices for copper and gold.

 

Edegel’sphysical sales in 2005 increased nearly 6.3% compared to sales in 2004. Salesin the spot market decreased nearly 15%, while contracted sales increased 12%in 2005 as compared to 2004. The increase in contracted sales is mainlyexplained by greater sales to regulated distribution companies. During 2005,the number of Edegel’s regulated customers increased from two to eight as aconsequence of the agreements reached between generation companies and theM.M.E. (Ministerio de Minas y Energía) to solve the situation of distributorswithout electricity supply contracts. Sales to these six new regulatedcustomers represented 15% of Edegel’s contracted sales in 2005. The companymaintains nine non-regulated customers whose purchases represented 47% ofEdegel’s total contracted sales in 2005, compared to 53% in 2004.

 

Thedistribution of Edegel’s physical sales, in terms of customer segment, is shownin the following table:

 

**PHYSICAL SALES PERCUSTOMER SEGMENT IN PERU (GWh)**

 
| ** **              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **              | ** ** | **Sales**                                  | ** ** | **% of Sales  Volume** | ** ** | **Sales** | ** ** | **% of Sales  Volume** | ** ** | **Sales** | ** ** | **% of Sales  Volume** | ** ** |
| ** **              | ** ** | **(GWh)**                                  | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** | **(GWh)** | ** ** | ** ** | ** ** |
| Contracted sales        |       | 3,134                                      |       | 70.5 |   | 3,344 |   | 77.3 |   | 3,766 |   | 81.9 |   |
| Non-Contracted sales    |       | 1,309                                      |       | 29.5 |   | 984 |   | 22.7 |   | 834 |   | 18.1 |   |
| Total Electricity sales |       | 4,443                                      |       | 100.0 |   | 4,328 |   | 100.0 |   | 4,600 |   | 100.0 |   |

 

BecauseSEIN is the only interconnected transmission system in Peru, all generationcompanies connected thereto may be considered competitors. However, our mostimportant competitors in Peru are the hydroelectric generators, ElectroPeru andEgenor, whose capacity is approximately 908 MW and 509 MW, respectively.

 

**ElectricityGeneration in Peru—Industry Structure and Regulatory Framework**

 

Theregulatory framework for the electricity industry in Peru was modeled after theregulatory framework was enacted in Chile. Its main regulations are: Law ofElectrical Concessions (Law Decree No. 25,844) and its corresponding regulation(Supreme Decree No. 009-93 EM), Technical Regulation on the Quality of theElectrical Supply (Supreme Decree No. 020-97 EM), Electricity Import and ExportRegulation (Supreme Decree 049-2005-EM), Antitrust Law on the Electrical Sector(Law No. 26,876) and its corresponding regulation (Supreme Decree No.017-98-ITINCI), Law No. 26,734, which created the regime that supervisesInvestments in Energy and its Regulation (Supreme Decree No. 005-97-EM), inaddition to the supplementary Law 27,699 of *Organismo Supervisor de laInversión en Energía*, or OSINERG (the Peruvian regulatoryelectricity authority) and the regulation for resolution of controversies thatarise within this institution (Resolution No. 0826-2002-OS/CD).

 

Someof the most important characteristics of the regulatory framework of theelectricity industry in Peru are (i) vertical disintegration, or separation ofthe three main activities: generation, transmission and distribution; (ii)freedom of prices for the supply of energy in competitive markets and a systemof regulated prices based on the principle of efficiency (correct allocationand utilization of resources and the supply of electricity at minimum costs);and (iii) private operation of the interconnected electricity systems subjectto the principles of efficiency and service quality (compliance with thetechnical requirements established in regulations affecting the sector).

 

Theelectricity sector in Peru consists of one main interconnected system, SEIN. Asof October 2000 the two prior interconnected systems, *SistemaInterconectado Central-Norte*(SICN), and*SistemaInterconectado Sur* (SIS), were connected and formed the singleintegrated system. Currently, the system is prepared to supply energy across atie line to Ecuador, but the commercial and operative agreements are stillunder negotiation.

 

In Peru, the *Ministerio de Energía y Minas*, or the Ministry of Energy andMines, defines energy sector policies, regulates matters relating to theenvironment, and oversees the granting, supervision, maturity and terminationof

 

61

----

 

licenses,authorizations and concessions for generation, transmission, and distributionactivities, among others. The *Organismo Supervisor de laInversión en Energía*, or OSINERG, is an autonomous public regulatoryentity established in 1996 to control the compliance with legal and technicalregulations related to electrical and hydrocarbon activities, as well as theconservation of the environment in connection with the development of theseactivities. In September 2001, the *Comisión de Tarifas deEnergía*, or CTE, was absorbed by OSINERG. As a consequence, OSINERG’s*Gerencia Adjunta de Regulación Tarifaria*performs CTE’s functions, which include publishing the regulated tariffs. The *Comité de Operación Económica del Sistema*, or COES,coordinates the dispatch of electricity of Peru’s SEIN in a manner similar tothe CDECs in Chile and prepares the technical and financial study that servesas a basis for the annual busbar (i.e., node) tariff calculations. However,Peru’s COES consists of generation and transmission companies.

 

As ofOctober 1997, technical standards have been established in order to compare thequality and conditions of the service provided by electricity companies. As ofOctober 1999, companies that do not meet the minimum quality standards aresubject to fines and penalties imposed by OSINERG, as well as to compensatorymechanisms for customers who received substandard service.

 

***Dispatch and Pricing***

*** ***

Thedispatch methodology and pricing at the generation level in Peru is similar tothe dispatch methodology and pricing in Chile, except that “node” prices arereferred to as “busbar” prices in Peru and unregulated customers in Peru arethose with demand greater than 1 MW. Supplies for capacity demand lower than 1MW are considered a public service supply. Since 1999, capacity payment isdetermined with regard to a fixed guaranteed component based on the efficiencyof each plant and a variable component dependant on the level of dispatch ofeach plant.

 

***Transmission***

*** ***

At thetransmission level in Peru, transmission lines are divided into principal andsecondary systems. The principal system lines are accessible to all generatorsand allow electricity to be carried out to all customers. The transmissionconcessionaire receives an annual fixed income (RAG, remuneración anual garantizada)regulated by OSINERG, and also receives tariff revenues and connection tollsreflecting a charge per kW. The secondary system lines are accessible to allgenerators, but are used to serve only certain customers, who in turn areresponsible for making payments related to their use of the system.

 

***Distribution Pricing***

*** ***

Salesby generation companies to distribution companies of capacity or energy forresale to regulated customers must be made at busbar prices set by OSINERG. Since2005, the busbar prices for capacity and energy are published annually (only inApril) according with the last modification of the law (see below). Busbarprices are the maximum prices for electricity purchased by distributioncompanies that can be transferred to regulated customers. Although these pricesare quoted in Peruvian soles, the calculations are mainly performed in U.S.dollars. Other conditions of distribution pricing are similar to those inChile.

 

Theelectricity tariff for a customer of the *Servicio Público de Electricidad*(regulated clients) includes charges for capacity and energy from generationand transmission (busbar prices) and from the VAD (value added by distribution)which considers a regulated return over capital investments, operating andmaintenance fixed charges and a standard percentage for energy distributionlosses.

 

***Concessions***

 

Aconcession for electricity generation activities is required when a power planthas an installed capacity in excess of 10 MW.

 

Anauthorization for electricity generation activities is required when either:

 

•                  athermoelectric power plant has an installed capacity of 500 kW; or

 

•                  ahydroelectric or geothermal power plant has an installed capacity between 500kW and 10 MW.

 

62

----

 

Aconcession of electricity generation activity constitutes an agreement betweenthe generator and Ministry of Energy and Mines while an authorization is merelya unilateral permission granted by the Ministry. Authorizations and concessionsare granted by the Ministry for an unlimited period of time although itstermination is subject to the same considerations and requirements as thetermination of a concession under the procedures set forth in the Law ofElectrical Concessions and its regulations and amendments.

 

***Changes to the regulatory framework during 2005***

*** ***

During2005, the main regulatory changes approved were the following:

 

•                  Asa consequence of the approval of Law 28447, the Regulation of the Law ofElectrical Concessions (Supreme Decree 009-93-EM) was modified by SupremeDecree 012-2005-EM.

 

•                  ATechnical Regulation for the coordination of the operation in real time of theinterconnected systems was approved by Directoral Resolution 014-2005-EM/DGE.

 

•                  TheEnvironmental General Law has been approved. The law establishes the generallegal framework for environmental management, basic principles and regulationsthat assure the effective exercise of the right to a healthy, equilibrate andadequate environment for the development of life.

 

•                  SupremeDecree 038-2005-EM approved the amendment of paragraph c) of Article 124 of theRegulation of the Law of Electrical Concession which regulates the treatment ofthe various fuel costs for tariff purposes.

 

The Commission created by Law 28,447 and formed by Ministeriode Energía y Minas and OSINERG to study and implement efficient methods forelectricity generation development, has prepared a proposal to change the Lawof Electricity Concessions, that has been sent to the Peruvian Congress, and wecannot predict its final result.

 

**C. Organizationalstructure**

** **

Thefollowing information sets out a brief description of Endesa Chile’ssignificant subsidiaries for the period covered by this report.

 

**Endesa Costanera S.A.(Costanera)**

** **

Endesa Costanerais an electricity generation company publicly traded in Argentina with 2,303.6MW total installed capacity in Buenos Aires including two turbines with anaggregate 1,452 MW capacity oil and gas-fired generation facility and a 852-MWcapacity natural gas combined-cycle facility that came into service in December1998. The facility was acquired from the Argentine government following theprivatization of *Servicios Eléctricos del Gran BuenosAires S.A.*in 1992 when Endesa Chile acquired a 24% interest. EndesaChile subsequently increased its interest reaching a total ownership share todate, directly and through its subsidiary Endesa Argentina, of 64.26%. Endesa Costanerais incorporated in Argentina.

 

**HidroeléctricaEl Chocón S.A. (El Chocón)**

** **

El Chocónis an electricity generation company, incorporated in Argentina, locatedbetween the Neuquén and Río Negro provinces in southern Argentina (the ComahueZone). It has two hydroelectric power stations with an aggregate installedcapacity of 1,320 MW. El Chocón is currently the second largesthydroelectric facility in Argentina. This 30-year concession was granted by theArgentine government to our subsidiary, Hidroinvest S.A., which bought59.00% of the shares in July 1993 during the privatization process. EndesaChile operates El Chocón for a fee pursuant to an operating agreement witha term equal to the duration of the concession. Endesa Chile’s has an indirectownership of 47.44% and a 65.19% voting share in El Chocón.

 

**Centrais ElétricasCachoeira Dourada S.A. (Cachoeira Dourada)**

** **

CachoeiraDourada, incorporated in Brazil, is located in Goias state, south of Brasilia.It owns a run-of-the-river hydroelectric plant with a total installed capacityof 658 MW.

 

63

----

 

InSeptember 1997, a consortium comprised of Endesa Chile, with an 81.94% interestand Endesa Chile’s Peruvian affiliate, Edegel, with its 18.06% interest, wasawarded 79.36% of the share capital of Cachoeira Dourada in a 30-yearconcession. Between 1997 and 2003, Endesa Chile increased its total indirectownership in Cachoeira Dourada to 92.51%, and its voting share to 99.61%.

 

BeginningOctober 2005, Cachoeira Dourada contributes its assets to the holding companyEndesa Brasil, a related company owned by Endesa Chile with a directownership of 37.85%.

 

**Empresa EléctricaPehuenche S.A. (Pehuenche)**

** **

Pehuenche,a generation company connected to the SIC, owns three hydroelectric facilitiessouth of Santiago in the high-rainfall hydrological basin of the Maule riverwith a total of 695 MW of installed capacity. Its 566 MW Pehuenche plantstarted operating in 1991, its 89 MW Curillinque plant started up in late 1993,and its 40 MW Loma Alta plant started operating in August 1997. Endesa Chileholds 92.65% of the share capital of Pehuenche, which is incorporated in Chile.

 

**Empresa EléctricaPangue S.A. (Pangue)**

** **

Panguewas incorporated to build and operate the 467 MW installed capacityhydroelectric power station in the Bío-Bío river. The first unit commencedoperations on October 31, 1996, while the second unit commenced operations onFebruary 3, 1997. Endesa Chile holds 94.98% of the share capital of Pangue,which is incorporated in Chile.

 

**Compañía EléctricaTarapacá S.A. (Celta)**

** **

Celtais incorporated in Chile and was formed in November 1995 to build and operatethe 182 MW coal-fired thermal plant in the SING. Celta is a 100% ownedsubsidiary of Endesa Chile.

 

**Compañía EléctricaSan Isidro S.A. (San Isidro)**

** **

SanIsidro was incorporated in Chile in February 1996 to build and operate a 379 MWcombined-cycle thermal plant in Quillota in the Fifth Region. The plant begancommercial operations in October 1998. A 220 kV transmission line of 9kilometers was built to connect this thermal plant to the SIC. Thistransmission system is owned by Transquillota Ltda., in which San Isidro has a50% interest. Endesa Chile holds 100% ownership share capital of San Isidro.

 

**Empresa deIngeniería Ingendesa S.A. (Ingendesa)**

** **

Ingendesais a multi-disciplinary engineering company founded in late 1990. Its purposeis to provide engineering services, project management and related services inChile and internationally. It therefore offers all the necessaryspecializations: civil, mechanical and electrical engineering, metallurgy,architectural and environmental services. Ingendesa S.A. is a 97.64% ownedsubsidiary of Endesa Chile and is incorporated in Chile. In September 2005,Endesa Chile acquired 1.11% of the shares of Ingendesa S.A. Endesa Chileowns 98.75% of this company, which is incorporated in Chile.

 

**Túnel ElMelón S.A. (Túnel El Melón)**

** **

TúnelEl Melón S.A. was formed in July 1993 to construct and manage the publicroad tunnel called Túnel El Melón, under a 23-year concession. It includes 3.3km of access roads and a tunnel approximately 2.5 km long. It is located 130 kmnorth of Santiago and was the first infrastructure concession granted by theChilean state. Commercial operation of the tunnel began in September 1995.Endesa Chile owns 99.95% of this company, which is incorporated in Chile.

 

**Emgesa S.A.E.S.P. (Emgesa)**

** **

On September 15, 1997, CentralHidroeléctrica de Betania, through its subsidiary Inversiones Betania S.A.and in association with Endesa Desarrollo S.A. of Spain, was awardedcontrol of the generation company Emgesa, with 48.48% of the shares. Emgesa hasa total installed generating capacity of 2,116.3 MW. Both Endesa Chile and

64

----

 

CompañíaElectrica Conosur have an additional 0.05% of Capital de Energia S.A.Endesa Chile’s indirect ownership in Emgesa was 22.42%. Emgesa was incorporatedin Colombia.

 

**CentralHidroeléctrica de Betania S.A. E.S.P. (Betania)**

** **

Betaniais a hydroelectric generation facility with installed capacity of 540.9 MW, andis located at the intersection of the Magdalena and Yaguará rivers, in thesouthwest of Colombia. In December 1996, a consortium comprised of EndesaChile, with a 75% interest, and the Colombian company Corfivalle, with theremaining 25% interest, was awarded 99.9% of the share capital of Betania. Followinga capital increase in 1999, in which Corfivalle did not participate, EndesaChile’s economic interest increased to 85.62% of Betania. Betania wasincorporated in Colombia.

 

**Edegel S.A.A.(Edegel)**

** **

Edegelis an electricity generation company, acquired by Endesa Chile in 1995. Itcurrently owns seven hydroelectric plants (Huinco, Matucana, Callahuanca,Moyopampa, Huampani, Yanango and Chimay) and one thermal plant (Santa Rosa),with a combined installed capacity of 968.5 MW. In 2000, Edegel completed theconstruction of two hydroelectric plants, Yanango (43 MW) and Chimay (153 MW),and a 220 kV transmission line linking both plants to the Peruvian system. EndesaChile had a 37.90% indirect ownership share in this subsidiary. Endesa Chilehas a 63.56% voting share in Edegel through *Generandes Peru S.A.*Edegelis incorporated in Peru.

 

**SociedadConcesionaria Autopista del Sol S.A.**

** **

Thiscompany was sold through the divesture of Infraestructura 2000, which tookplace on June 23, 2003. It was originally formed to build and manage theSantiago-San Antonio Highway No. 78 under a 23-year concession. The highway is108 km long. The first section between Malloco and San Antonio began operationsin April 1997, while the section Santiago-Malloco began its operations inJanuary 1998. The Ministry of Public Works gave its final approval of thehighway public works in June 2001. Through Infraestructura 2000, Endesa Chileheld a 60.04% interest in this subsidiary as of December 31, 2002. Autopistadel Sol S.A. was incorporated in Chile.

 

**Autopista losLibertadores S.A.**

** **

Thiscompany was sold on June 23, 2003 through the divesture of Infraestructura2000, which took place on June 23, 2003. It was originally formed to build andmanage the Santiago-Colina-Los Andes Highway under a 28-year concession. Theproject consists of the widening and improvement of the present General SanMartín highway, approximately 90 km long, and includes the construction of atwo-lane highway and access roads between Santiago and Colina, a Colinatwo-lane bypass between Peldehue and Casas de Chacabuco and a one-lane LosAndes by-pass. It also includes the improvement and resurfacing of theChacabuco tunnel. In December 2001, the Ministry of Public Works gave its finalapproval of the highway works. Endesa Chile’s indirect shareholding, throughInfraestructura 2000, in Autopista Los Libertadores was 58.36% as of December31, 2002. Autopista Los Libertadores S.A. was incorporated in Chile.

 

**EndesaECO S.A. (Endesa ECO)**

** **

OnApril 18, 2005, Endesa Chile constituted a new subsidiary company called EndesaEco, whose objectives will be to promote and develop renewable energy projectslike mini-hydro, aeolic, geothermal, solar, biomass and other energy means andto act as the depositary and trader of emission reduction certificates obtainedby these projects. Endesa Chile owns 100% of this company, which isincorporated in Chile.

 

**Main RelatedCompanies**

** **

**Comercializadorade Energía del Mercosur S.A. (CEMSA)**

** **

CEMSA is responsible fortrading electricity, including imports and exports of energy. As of the date ofthis report, Endesa Chile has an indirect ownership holding in CEMSA of 45%.CEMSA’s other shareholder is Endesa-Spain. CEMSA is incorporated in Argentina.

 

65

----

 

**Companhia deInterconexão Energética S.A. (CIEN)**

** **

ThisBrazilian company is responsible for trading electricity in the Brazilianmarket. CIEN built two 500 kV transmission lines next to each other over adistance of approximately 500 km from Rincón, Argentina, to Itá in the State ofSanta Catarina, Brazil. CIEN has received two 20-year authorizations from ANEELto operate the Brazilian side of the transmission lines, after which time thetransmission lines and the converter stations will become the property of theBrazilian government. CIEN, through its subsidiaries CTM and TESA, owns andoperates the Argentine side of both lines. Since October 2005, CIEN contributedits assets to the holding company Endesa Brasil, a related company ownedby Endesa Chile with a direct ownership of 37.85%.

 

**Compañía deTransmisión del Mercosur S.A. (CTM)**

** **

CTM isan electricity transmission company that owns the Argentine portion of aninterconnection line joining the Brazilian and Argentina electricity markets. Thiscompany was incorporated in Argentina in July 1997. Since October 2005, CTMcontributed its assets to the holding company Endesa Brasil, a relatedcompany owned by Endesa Chile with a direct ownership of 37.85%.

 

**Transportadora deEnergía del Mercosur S.A. (TESA)**

** **

TESAis an electricity transmission company that owns the Argentine portion of aninterconnection line joining the Brazilian and Argentine electricity markets. Thiscompany was incorporated in Argentina in January 2001. Since October 2005, TESAcontributed its assets to the holding company Endesa Brasil, a relatedcompany owned by Endesa Chile with a direct ownership of 37.85%.

 

**Electrogas S.A.(Electrogas)**

** **

Electrogaswas incorporated in Chile, in late 1996. The objective of this company is tooffer natural gas transportation services to the Fifth Region of Chile,especially to the San Isidro and Nehuenco combined-cycle plants at Quillota. EndesaChile has an added direct and indirect ownership of 42.5% share in this company.The other shareholders are Colbún S.A. and Enap.

 

**GasAtacama S.A.(GasAtacama)**

** **

EndesaChile has a 50% total ownership interest in GasAtacama, a company incorporatedin Chile. CMS Energy Corp. (CMS), a U.S. corporation, has the remaining 50%ownership interest. The purpose of this company is the administration of itssubsidiaries, including Gasoducto Atacama Chile S.A., Gasoducto AtacamaArgentina S.A. and GasAtacama Generación, which are involved inelectricity generation and natural gas transportation.

 

**Gasoducto AtacamaChile S.A. (Gasoducto Atacama)**

** **

GasoductoAtacama was formed under the laws of Chile, with the purpose of transportingnatural gas both within Chile and abroad, including the construction andplacement of pipelines and any other related activities. The company owns theChilean side of a natural gas pipeline that can transport up to 8.5 millioncubic meters of gas daily from northern Argentina to Mejillones in Chile whichcommenced supplying gas to the SING in July 1999 and also owns an extension ofthis pipeline from Mejillones to Taltal in Chile, which was added in 2000,allowing Endesa Chile’s 240 MW Taltal thermal power plant to be put intoservice the same year, supplying electricity to the SIC.

 

Thecompany Gasoducto Atacama Companía Limitada changed its name to GasoductoAtacama Chile Limitada in October 2002, and changed again in December 2003 toGasoducto Atacama Chile S.A. Endesa Chile has a 50% indirect ownershipshare in Gasoducto Atacama.

 

**GasAtacamaGeneración S.A. (GasAtacama Generación)**

** **

Thepurpose of this company, incorporated in Chile, is to generate, transmit,purchase, distribute and sell electric energy in the SING. It owns and operatestwo combined cycle power plants that together have 780 MW of

 

66

----

 

installedgeneration capacity. The company *Nor Oeste PacificoGeneración de Energía Limitada* (“Nopel Ltda.”) changed its name toGasAtacama Generación Limitada in October 2002, and changed again in December2003 to GasAtacama Generación S.A. Endesa Chile has a 50% indirectownership share in this company.

 

**Endesa Brasil S.A.(Endesa Brasil)**

** **

Jointlywith Endesa Internacional, Enersis and Chilectra, which have contributed theirrespective assets in Brazil, we have formed a holding company calledEndesa Brasil, creating the third largest private electricity entity inthe Brazilian market. Endesa Brasil was incorporated in Brazil in June2005 and intends to capitalize growing opportunities in the Brazilian market. EndesaChile holds 37.85% of Endesa Brasil, through which its subsidiariesEdegel S.A. and Compañía Eléctrica Cono Sur S.A. have contributedtheir assets in Cachoeira Dourada S.A. (92.51%), Companhia De InterconexãoEnergética S.A., (“CIEN”), (45%), Compañía de Transmisión delMercosur S.A. (“CTM” 45%)****and inTransportadora de Energía del Mercosur S.A. (“TESA”****45%)

 

Thepurpose of this company is to generate, transmit, purchase, distribute and sellelectricity energy in Brazil. It owns and operates a combined cycle generatingplant with 319 MW, Fortaleza, which is located 50 kilometers from the capitalof the Brazilian State of Ceará and which began commercial operations inDecember 2003; a run-of-the-river hydraulic power plant, CachoeiraDourada S.A., with 658 MW of installed generation capacity and is locatedin Goias state, south of Brasilia; two transmission lines which operate inBrazil in the commercialization and transportation of electricity betweenArgentina and Brazil through a 2,100 MW interconnection line between Argentinaand Brazil; a distribution company Ampla, which is the second largestelectricity distribution company in the State of Rio de Janeiro, is engagedprincipally in the distribution of electricity to 66 municipalities of theState of Rio de Janeiro and serves 2.1 million customers in a concession areaof 32,054 square kilometers, where an estimated population of 4.1 millionpeople live; and a distribution company, Coelce, which is the sole electricitydistributor in the State of Ceará, in northeastern Brazil and which servicesover 2.3 million customers within a concession area of 148,825 squarekilometers.

 

67

----

 

Thefollowing table sets forth the main subsidiaries and related companies ofEndesa Chile and the percentage of each subsidiary and related company owned byEndesa Chile (for voting power held in each subsidiary see Exhibit 8.1):

 

**Percentage ofEconomic Interest in each Operational Subsidiary and Related Company perCountry**

 

**SUBSIDIARIES (as of December 31, 2005)**

 
| **GENERATION**                                  | ** ** | **ENGINEERING  SERVICES**       | ** ** | **INFRASTRUCTURE(1)**                |
|-------------------------------------------------|------------|---------------------------------|------------|--------------------------------------|
| **Argentina**                                   | ** ** | **Brazil**                      | ** ** | **Chile**                            | ** ** | **Colombia** | ** ** | **Peru** | ** ** | **Chile** | ** ** | **Chile** |
| Endesa Costanera  64.26%                   |       |                            |       | Pehuenche  92.65%                    |   | Emgesa  22.42% |   | Edegel  37.90% |   | Ingendesa  98.75% |   | Túnel  El Melón 99.95% |
| Hidroeléctrica  El Chocón 47.44% |       |                            |       | Pangue  94.98%(2)                    |   | Betania  85.62% |   |   |   |   |   |   |
|                                            |       |                            |       | Celta  100%                          |   |   |   |   |   |   |   |   |
|                                            |       |                            |       | San  Isidro 100%                     |   |   |   |   |   |   |   |   |
|                                            |       |                            |       |                                 |   |   |   |   |   |   |   |   |
| **Related  Companies (all business segments)**  |
| CEMSA  45%                                      |       | Endesa Brasil  (3)  37.85% |       | **GasAtacama  Generación 50%**  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                            |       |                            |       | **Electrogas  42.5%**                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                            |       |                            |       | **Gasoducto  Atacama Chile 50%**     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                            |       |                            |       | **Gasoducto  Atacama Argentina 50%** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                            |       |                            |       | **Gasoducto  Taltal Ltda. 50%**      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                            |       |                            |       | **Transquillota  37.5%**             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |

 

----

(1)   On June 23, 2003, Endesa Chile closed the saleof Infraestructura Dos Mil with the Spanish company OHL Concesiones, S.L.,subsidiary of the Spanish company Obrascón Huarte Lain S.A. ThroughInfraestructura Dos Mil, Endesa had a 60.04% shareholding in SociedadConcesionaria Autopista del Sol and a 58.36% shareholding in SociedadConcesionaria Autopista Los Libertadores.

 

(2)   Endesa Internacional S.A., subsidiary ofEndesa-Spain, has a 5.01% shareholding in Pangue.

 

(3)   In October 2005, Endesa Chile contributes itsBrazilian assets to create the Holding company Endesa Brasil.

 

Wecontinually evaluate potential asset reorganizations with the purpose ofoptimizing operating, financing and tax considerations. We are currentlyexpecting to undertake such a transaction; namely, a reorganization of ourinterests in Peru.

 

Thegoal of the Peruvian project is to achieve generation synergies through themerger of Edegel and Empresa de Generación Termoeléctrica Ventanilla S.A.(“Etevensa”), a 342 MW thermoelectric generation company 60%-owned byEndesa-Spain. On January 17, 2006, this project was approved throughshareholder meetings of both companies. Endesa Chile will consolidate Etevensathrough Edegel.

 

68

----

 

Thefollowing table shows, as of December 31, 2005, Endesa Chile’s direct andindirect economic interests in each and every company in and outside of Chile:

 

 

 

 

69

----

 

**D.    Property, Plant and Equipment**

** **

**Description ofProperty and Insurance**

** **

EndesaChile’s main properties in Chile are its 22 electricity generation facilitiesdetailed below, in addition to its 27,793 square meter headquarters buildingsin Santiago.

 

Asubstantial portion of Endesa Chile’s cash flow and net income is derived fromthe sale of electricity produced by its electricity generation facilities. Significantdamage to one or more of Endesa Chile’s main electricity generation facilitiesor interruption in the production of electricity, whether as a result of anearthquake, flood, volcanic activity or other cause, would have a materialadverse effect on Endesa Chile’s operations. Endesa Chile insures all of itselectricity generation facilities against damage due to earthquakes, fires,floods and other similar occurrences and from damage due to third-partyactions, based on the appraised value of the facilities as determined from timeto time by an independent appraiser. Based on geological, hydrological andengineering studies, however, Endesa Chile’s management believes that the riskof such an event is remote. Claims under Endesa Chile’s insurance policies aresubject to customary deductibles and other conditions. Endesa Chile alsomaintains business interruption insurance providing for coverage for failure ofany of its facilities for a period of up to 18 months, commencing after thedeductible period. However, there can be no assurance that such insuranceproceeds would be available on a timely basis or would be sufficient to fullycompensate for any losses.

 

EndesaChile also has investments in generating companies in Argentina, Brazil(through September 30, 2005), Colombia and Peru, which involve a total of 24generation power plants detailed below. The insurance coverage taken abroad isapproved by the management of each affiliate, taking into account the qualityof the insurance companies and the needs, conditions and risk evaluations ofeach generating facility, and are based on general corporate guidelines givenby Endesa Chile.

 

All insurance policies are purchased from reputableinternational insurers. The Company continuously monitors the insurance industrymarketing order to obtain what it believes to be the most commerciallyreasonable coverage and premiums available on the market.

 

Thefollowing table identifies the power plants that Endesa Chile owns and theirbasic characteristics:

 

70

----

 
| **Country/Company**                                   | ** ** | **Power  Plant Name**                        | ** ** | **Power  Plant Type (3)**               | ** ** | **2003**  | ** ** | **2004** | ** ** | **2005** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| ** **                                            | ** ** | ** **                                   | ** ** | ** **                              | ** ** | **MW(1)** | ** ** |
| **Argentina**                                         |       |                                         |       |                                    |       |      |       |     |       |     |       |
| Endesa  Costanera S.A.                           |       | Total                                        |       |                                    |       | 2,302     |       | 2,303    |       | 2,304    |       |
|                                                  |       | Costanera  Steam Turbine                     |       | Steam  Turbine/Natural Gas+ Fuel Oil    |       | 1,131     |       | 1,131    |       | 1,131    |       |
|                                                  |       | Costanera  Combined Cycle II                 |       | Combined  Cycle/Natural Gas+Diesel Oil  |       | 851       |       | 852      |       | 851      |       |
|                                                  |       | Central Buenos Aires (CBA)  Combined Cycle I |       | Combined  Cycle/Natural Gas             |       | 320       |       | 320      |       | 322      |       |
|                                                  |       |                                         |       |                                    |       |      |       |     |       |     |       |
| Hidroelectrica  El Chocón S.A.         |       | Total                                        |       |                                    |       | 1,320     |       | 1,320    |       | 1,320    |       |
|                                                  |       | Chocón                                  |       | Reservoir                               |       | 1,200     |       | 1,200    |       | 1,200    |       |
|                                                  |       | Arroyito                                     |       | Pass  Through                           |       | 120       |       | 120      |       | 120      |       |
| Total  Capacity in Argentina                          |       |                                         |       |                                    |       | 3,622     |       | 3,623    |       | 3,624    |       |
| **Brazil  (2)**                                       |       | ** **                                   |       | ** **                              |       |      |       |     |       |     |       |
| Centrais Elétricas Cachoeira  Dourada S.A.  |       | Cachoeira  Dourada                           |       | Pass  Through                           |       | 658       |       | 658      |       | —   |       |
| Total Capacity in Brazil                              |       |                                         |       |                                    |       | 658       |       | 658      |       | —   |       |
| **Chile**                                             |       | ** **                                   |       | ** **                              |       |      |       |     |       |     |       |
| Endesa  Chile                                         |       | Total                                        |       |                                    |       | 2,040     |       | 2,754    |       | 2,754    |       |
|                                                  |       | Hydroelectric                                |       |                                    |       | 1,565     |       | 2,254    |       | 2,254    |       |
|                                                  |       | Rapel                                        |       | Reservoir                               |       | 377       |       | 377      |       | 377      |       |
|                                                  |       | Cipreses                                     |       | Reservoir                               |       | 106       |       | 106      |       | 106      |       |
|                                                  |       | El  Toro                                     |       | Reservoir                               |       | 450       |       | 450      |       | 450      |       |
|                                                  |       | Los  Molles                                  |       | Pass  Through                           |       | 18        |       | 18       |       | 18       |       |
|                                                  |       | Sauzal  (4)                                  |       | Pass  Through                           |       | 90        |       | 77       |       | 77       |       |
|                                                  |       | Sauzalito                                    |       | Pass  Through                           |       |      |       | 12       |       | 12       |       |
|                                                  |       | Isla                                         |       | Pass  Through                           |       | 68        |       | 68       |       | 68       |       |
|                                                  |       | Antuco                                       |       | Pass  Through                           |       | 320       |       | 320      |       | 320      |       |
|                                                  |       | Abanico                                      |       | Pass  Through                           |       | 136       |       | 136      |       | 136      |       |
|                                                  |       | Ralco                                        |       | Reservoir                               |       | —    |       | 690      |       | 690      |       |
|                                                  |       | Thermal                                      |       |                                    |       | 475       |       | 500      |       | 500      |       |
|                                                  |       | Huasco                                       |       | Steam  Turbine/Coal                     |       | 16        |       | 16       |       | 16       |       |
|                                                  |       | Bocamina                                     |       | Steam  Turbine/Coal                     |       | 128       |       | 128      |       | 128      |       |
|                                                  |       | Diego  de Almagro (5)                        |       | Gas  Turbine/Diesel Oil                 |       | 24        |       | 47       |       | 47       |       |
|                                                  |       | Huasco                                       |       | Gas  Turbine/IFO 180 Oil                |       | 64        |       | 64       |       | 64       |       |
|                                                  |       | Taltal                                       |       | Gas  Turbine/Natural Gas                |       | 243       |       | 245      |       | 245      |       |
| Empresa  Electrica Pehuenche S.A.                |       | Total                                        |       |                                    |       | 695       |       | 695      |       | 695      |       |
|                                                  |       | Pehuenche                                    |       | Reservoir                               |       | 566       |       | 566      |       | 566      |       |
|                                                  |       | Curillinque                                  |       | Pass  Through                           |       | 89        |       | 89       |       | 89       |       |
|                                                  |       | Loma  Alta                                   |       | Pass  Through                           |       | 40        |       | 40       |       | 40       |       |
| Empresa  Electrica Pangue S.A.                   |       | Pangue                                       |       | Reservoir                               |       | 467       |       | 467      |       | 467      |       |
| Compañía Electrica San  Isidro S.A.    |       | San  Isidro                                  |       | Combined  Cycle /Natural Gas+Diesel Oil |       | 379       |       | 379      |       | 379      |       |
| Compañía  Electrica Tarapacá S.A. |       | Total                                        |       |                                    |       | 182       |       | 182      |       | 182      |       |
|                                                  |       | Tarapacá                                |       | Steam  Turbine/Coal                     |       | 158       |       | 158      |       | 158      |       |
|                                                  |       | Tarapacá                                |       | Gas  Turbine/Diesel Oil                 |       | 24        |       | 24       |       | 24       |       |
| Total Capacity in Chile                               |       |                                         |       |                                    |       | 3,763     |       | 4,477    |       | 4,477    |       |
| **Colombia**                                          |       | ** **                                   |       | ** **                              |       |      |       |     |       |     |       |
| Emgesa S.A.  E.S.P.                              |       | Total                                        |       |                                    |       | 2,049     |       | 2,069    |       | 2,116    |       |
|                                                  |       | Guavio  (6)                                  |       | Reservoir                               |       | 1,150     |       | 1,150    |       | 1,164    |       |
|                                                  |       | Paraíso  (7)                            |       | Reservoir                               |       | 600       |       | 276      |       | 276      |       |
|                                                  |       | La  Guaca                                    |       | Pass  Through (8)                       |       |      |       | 324      |       | 325      |       |
|                                                  |       | Termozipa                                    |       | Steam  Turbine/Coal                     |       | 223       |       | 223      |       | 235      |       |
|                                                  |       | Minor  plants (9)                            |       | Pass  Through                           |       | 76        |       | 96       |       | 116      |       |
| Central Hidroelectrica de  Betania S.A. E.S.P.   |       | Betania                                      |       | Reservoir                               |       | 540       |       | 540      |       | 541      |       |
| Total Capacity in Colombia                            |       |                                         |       |                                    |       | 2,589     |       | 2,609    |       | 2,657    |       |
| **Peru**                                              |       | ** **                                   |       | ** **                              |       |      |       |     |       |     |       |
| Edegel S.A.                                      |       | Total                                        |       |                                    |       | 967       |       | 967      |       | 969      |       |
|                                                  |       | Huinco                                       |       | Pass  Through                           |       | 247       |       | 247      |       | 247      |       |
|                                                  |       | Matucana                                     |       | Pass  Through                           |       | 129       |       | 129      |       | 129      |       |

 

71

----

 
|                   |   | Callahuanca |   | Pass  Through           |   | 75     |   | 75     |   | 75     |   |
|------------------------|--------|-------------|--------|-------------------------|--------|--------|--------|--------|--------|--------|--------|
|                   |   | Moyopampa   |   | Pass  Through           |   | 65     |   | 65     |   | 65     |   |
|                   |   | Huampani    |   | Pass  Through           |   | 30     |   | 30     |   | 30     |   |
|                   |   | Yanango     |   | Pass  Through           |   | 43     |   | 43     |   | 43     |   |
|                   |   | Chimay      |   | Pass  Through           |   | 151    |   | 151    |   | 151    |   |
|                   |   | Santa  Rosa |   | Gas  Turbine/Diesel Oil |   | 228    |   | 227    |   | 229    |   |
| Total Capacity in Peru |   |        |   |                    |   | 967    |   | 967    |   | 969    |   |
| Total Endesa Chile     |   |        |   |                    |   | 11,599 |   | 12,333 |   | 11,727 |   |

 

----

(1)   Total installed capacity defined as the maximum MWcapacity of generation units, under specific technical conditions andcharacteristics.

 

(2)   Centrais Elétricas Cachoeira Dourada S.A. was asubsidiary of Endesa Chile until September 30, 2005, when it became asubsidiary of Endesa Brasil.

 

(3)   Reservoir and pass-through refer to ahydroelectric plant that uses a dam or a river, respectively, to move theturbines which generate electricity.

 

Steam refers to the technology of a thermal powerplant that uses either natural gas, coal, diesel or fuel oil to produce steamwhich moves the turbines to generate the electricity.

 

Gas Turbine (TG) or Open Cycle refers to thetechnology of a thermal power plant that uses either diesel or natural gas toproduce gas that moves the turbines to generate the electricity.

 

Combined Cycle refers to the technology of a thermalpower plant that uses either natural gas, diesel oil or fuel oil to generategas that moves the turbines to generate electricity then recuperates the gasthat escapes from that process to generate steam to move another turbine.

 

(4)   Sauzalito MW’s are included in Sauzal figure in 2003.

 

(5)   Includes one additional unit of Diego de Almagro (23MW), as of 2004 which Endesa Chile has rented from Codelco since 2001.

 

(6)   During 2005, 2 auxiliary units (7MW each) were addedto Guavio.

 

(7)   La Guaca MW’s are included in Paraiso figures in 2003.

 

(8)   Operates in series with Paraiso.

 

(9)   Six minor plants are registered with atotal capacity of 115,6 MW.

 

Inaddition to generation power plants, Endesa Chile owns other assets whoseamount is not significant, such as transmission assets in Peru and Túnel ElMelón in Chile. These assets altogether represent less than 1% of the value ofEndesa Chile’s total consolidated assets.

 

**EnvironmentalIssues**

** **

Theelectricity industry is subject to extensive environmental regulations thatrequire environmental impact studies in order to obtain approval for futureprojects. Endesa Chile’s subsidiaries have always included the environmentalregulations of the various jurisdictions in which they operate when planningtheir investment projects.

 

During2000, Endesa Chile defined, within its environmental strategy, specific goalsin terms of certification of its generation assets under the internationalstandard ISO 14.001. By December 2005, the Company had received certificationof 97.9% of its installed capacity in Latin America, which includes theCachoeira Dourada plant owned by Endesa subsidiary Centrais Elétricas CachoeiraDourada S.A. until Sept. 30, 2005.

 

During2005, Endesa Chile continued advancing in the achievement of this objective,certifying one power plant installation in Brazil, one in Chile and six inColombia, receiving certifications in respect of over 91% of total generationassets, representing 43 of its 47 generation facilities, which produced 89% ofthe Company’s total annual electricity generation in 2005.

 

For2006, the Company plans to certify one additional plant located in Chile,consequently expects to reach 98.6% of total asset generation certification.

 

**InvestmentProjects**

** **

Two new plant projects were completed and began operations in2005:

 

72

----

 

i)      Peru.Conversion of the Westinghouse Unit:

 

This project to convertEdegel’s Westinghouse turbine (121 MW) from a fuel based unit to natural gasburning unit began commercial operation on May 31, 2005, fully complying withthe scheduled program. This project allows the turbines to use Camisea naturalgas, improving their availability and efficiency.

 

ii)     Colombia.La Junca Plant:

 

OnJanuary 1, 2005, La Junca, a hydroelectric power plant with 19.4 MW capacitywhich belongs to Emgesa, began supplying its production to the ColombianNational Interconnected System. This power plant is considered to be a minorplant in the Colombian electric power system.

 

**Projects underDevelopment**

 

i)      Chile.San Isidro Power Plant Expansion Project:

 

This project consists ofthe installation of a CCGT (Combined Cycle Gas Turbine) of 379 MW located nextto San Isidro. On June 23, 2005, Endesa and Mitsubishi signed an EPC(Engineering, Procurement and Construction) and LTSA (Long Term ServiceAgreement) contract for 12 years. On December 20, 2005 a FNTP (full notice toproceed) was granted to Mitsubishi.

 

ii)     Chile.Palmucho Hydroelectric Power Plant:

 

This project consists ofa pass-through power plant which will benefit from the ecological flow of theRalco dam (27.1 m3/s) which is immediately released under the wall of the dam. During2005 all the necessary contracts for the development of the power station wereawarded, while on December 28, 2005, the request of definite electricalconcession was published. The power station is expected to begin operationsduring the fourth quarter of 2007.

 

iii)    Chile.Los Cóndores Project:

 

The feasibility studiesfor a 100 MW hydroelectric power plant, which would benefit from the MauleLagoon, are being developed. The analysis for the optimal configuration of thepower plant should be concluded during 2006.

 

iv)   Chile.Ojos de Agua Project:

 

This project consists ofthe construction of a mini hydro plant in the Seventh Region of Chile thatbenefits from the filtrations of the “La Invernada” lagoon to power a turbineof approximately 9 MW. This project is being developed by Endesa Eco.

 

v)    Chile.Aysen Hydroelectric Project:

 

The studies necessary todefine the optimal solutions for the hydraulic development of Aysen have begun.The project contemplates the construction of two power stations in the BakerRiver of 680 MW and 360 MW of installed capacity and two in the Pascua River of450 MW and 940 MW of installed capacity. First drafts of the studies areexpected to be concluded by the first semester of 2007.

 

vi)   Peru.Reconditioning the Callahuanca Power Plant:

 

In 2004,we entered into contracts for the reconditioning of Edegel’s Callahuanca powerplant in Peru. This project entails the renovation of control equipment and systems, and anestimated 7.5-MW capacity increase. Completion of the project is expected forthe first quarter of 2006.

 

vii)  Peru. Conversion of UTI (UnitedTechnologies International) Turbines:

 

73

----

 

OnJanuary 17, 2006, the Board of Directors of Edegel authorized the conversion oftwo turbines to gas based technology (total installed capacity of 106 MW),located at Santa Rosa Power Plant. The entrance in operation is expected forthe third quarter of 2006.

 

Endesa Chile continuously analyzes different growthopportunities in the countries in which it participates, with the objective ofenabling the Company to increase its value.

 

**Major Encumbrances**

** **

*Endesa Costanera S.A.’s*debt with Mitsubishi Corporation was used to finance the purchase of equipment.As of December 31, 2005, the value of the assets pledged as a guarantee of thisdebt was Ch$ 78.7 billion. Additionally, Endesa Costanera hasexecuted liens in favor of Credit Suisse First Boston in order to guarantee aloan in the amount of Ch$ 26.8 billion as of December 31, 2005.

 

*Pangue S.A.*executed the following liens and mortgages: (1) firstmortgage on the water rights and real estate on which the power plant islocated; (2) lien on the electricity lines, machinery and equipment of thepower plant; and (3) prohibition to sell, transfer or encumber such assets,including the definitive concession to establish the Pangue power plant. Thevalue of the pledged assets was Ch$ 89.3 billion at December 31, 2005. Theseencumbrances and prohibitions guarantee the obligations of *Pangue S.A.*with the project lenders: Skandinaviska Enskilda Banken, ExportDevelopment Corporation and Kreditanstalt für Wiederaufbau.

 

*SanIsidro* executed a lien in connection with equipment providedby Mitsubishi Corporation. As of December 31, 2005, the debt has been paid.

 

**Item4A. Unresolved Staff Comments**

** **

Notapplicable.

 

**Item5.    Operating and Financial Review andProspects**

** **

**A.    Operating results**

** **

**General**

** **

*Thefollowing discussion should be read in conjunction with our auditedconsolidated financial statements, included as Item 18 in this annual report,and the “Selected Consolidated Financial and Operating Data,” included in Item3 herein. Our consolidated financial statements are prepared in accordance withChilean GAAP, which differs in some important respects from U.S. GAAP. See Note32 to our audited consolidated financial statements, included in Item 18herein.*

 

**1.     Discussion of Main Factors AffectingOperating Results and Financial Condition of the Company**

** **

We ownand operate electricity generation companies in Chile, Argentina, Brazil,Colombia and Peru. Revenues and cash flow mainly come from the electricitygeneration business of Endesa Chile itself and of our subsidiaries and relatedcompanies, which operate in these five countries. For the years ended December31, 2003, 2004 and 2005 non-generation revenues represented approximately 3% oftotal consolidated revenues in each of those three years.

 

Factorssuch as hydrological conditions, regulatory developments, extraordinary actionsadopted by government authorities and economic conditions, including growthrate, inflation and exchange rates in each country in which we operate areimportant in determining our financial results. Also, our reported results ofoperations and financial position are significantly affected by Chilean GAAP’sTechnical Bulletin No. 64, “Accounting for Permanent Foreign Investments” whichrelates to the consolidation of the results of our companies outside of Chileas well as other critical accounting policies.

 

Ourportfolio strategy, with operations in different countries within LatinAmerica, allows the impact of significant changes in one country to be offsetby opposing changes in other countries, leading to non-material

 

74

----

 

impacts on consolidated figures.The impact of these factors on us, for the years covered by this report, isdiscussed below.

 

**a.     Hydrological Conditions**

** **

Interms of installed capacity, from 2003 to 2005, approximately 67% of EndesaChile’s total installed capacity has been hydroelectric. Consolidated hydroelectric capacity was 7,810 MW at December 31, 2003, and 8,518 MW at December31, 2004, the increase being explained by the start of operations at Ralco (See“Item 4. Property, Plants and Equipment” for information on the startup ofRalco) but reduced to 7,898 MW at December 31, 2005. Capacity was reduced in2005 because, starting in October 2005, Endesa Chile ceased to consolidateCachoeira Dourada, contributing this asset to Endesa Brasil (See “Item 4. Informationon the Company – A. History and Development of the Company” for details onEndesa Brasil). Consequently, at December 31, 2005, approximately 67% ofour consolidated generation capacity is dependent upon the hydrologicalconditions prevailing in the countries in which we operate, although onlyextreme hydrological conditions materially affect the Company’s operatingresults and financial condition.

 

Hydrologicalconditions for the period from 2003 to 2005 have not led to material changes inthe financial condition and results of operations of Endesa Chile. Hydroelectricgeneration was 35,035 GWh in 2003, 34,858 GWh in 2004 and 38,068 GWh in 2005. Totaloperating income was Ch$ 359.5 billion in 2003, Ch$ 382.3 billion in2004 and Ch$ 394.9 billion in 2005.

 

InEndesa Chile, we may compensate for the effect on physical and monetary salesof low hydrology (reservoir levels, rainfall, and snow), in the geographicalareas where our power plants are located, with thermal generation andelectricity purchases. The thermal capacity owned by the company and theability to purchase electricity from other generators, given the regulatoryframework of the industry in the countries in which we operate, enables EndesaChile to increase thermal generation and/or purchase electricity from otherindustry players in order to maintain the level of physical sales, when hydroconditions lead to a reduction in hydroelectric generation. Additionally, whenhydrology is low, given the industry structure and the percentage of hydrogeneration capacity in the countries in which we operate, the market price ofelectricity generally reacts by increasing. Low hydrology may therefore lead togreater revenues (depending on the weight of all the effects).

 

Interms of expenses, operational costs of thermal generation and energy purchasesare always greater than the Company’s corresponding economic cost ofhydroelectric generation. The cost of thermal generation does not directlydepend on the level of hydrology, but the cost of electricity purchases in thespot market does depend on the level of hydrology in the countries in which weoperate, due to the importance of hydro generation capacity in those countries.

 

Consequently,the impact of low hydrology on operating results depends on the sensitivity orreaction of the Company’s price of electricity sales in the market, theseverity of the impact of hydro conditions on the Company’s hydro generation,the Company’s cost of thermal generation, and the need for energy purchases. Theeffect on market prices may either partially or completely compensate(depending on the conditions of all relevant market factors) for the highercost of sales, leading to a non significant impact on operating results. Thermalgeneration was 7,591 GWh in 2003, 12,508 GWh in 2004 and 12,054 GWh in 2005. Totalfuel expenses reached Ch$ 51.3 billion in 2003, Ch$ 123.5 billion in2004 and Ch$ 153.4 billion in 2005. Energy purchases reached 8,397 GWh in2003, 6,474 GWh in 2004 and 6,396 GWh in 2005. The cost of energy purchases wasCh$ 101.2 billion in 2003, Ch$ 106.0 billion in 2004 andCh$ 105.5 billion in 2005.

 

In2004, Peru experienced low hydrology in comparison to what was registered in2003 and in 2005. The market reacted accordingly, recording an average price ofU.S.$ 37.0 per MWh in 2003, U.S.$ 67.8 per MWh in 2004, andU.S.$ 62.6 per MWh in 2005. Edegel’s hydro generation under thishydrological condition was 4,273 GWh in 2003, 3,891 GWh in 2004 and 4,096 GWhin 2005, while its energy sales followed the same trend, going from 4,443 GWhsold in 2003, to 4,328 GWh in 2004 and 4,600 GWh in 2005. Despite the adversehydrological scenario in 2004 and the effects it had on production, the impacton operating income was not severe, which were: Ch$ 65.1 billion in 2003,Ch$ 54.0 billion in 2004 and Ch$ 53.8 billion in 2005. Furthermore,in consolidated terms, Edegel’s operating results for 2003, 2004 and 2005 didnot substantially affect Endesa Chile’s total

 

75

----

 

consolidated results, due tothe percentage share of Edegel’s operations as part of Endesa Chile’s totalconsolidated operating income, reaching 18% in 2003, 14% in 2004 and 14% in2005.

 

**b.     Regulatory Developments**

** **

Theregulatory structure governing the electricity industry in the countries inwhich we have operations, including the tariff-setting models for regulatedcustomers, is a significant factor that may have a material effect on ouroperating results. From 2003 to 2005, approximately 40% of Endesa Chile’s totalsales volume has been delivered to regulated customers.

 

Regulatorsin the countries in which we operate calculate tariffs primarily by taking intoconsideration the cost of fuel, level of reservoirs, exchange rate, futureinvestments in installed capacity and growth in demand, all of which areintended to reflect investment and operating costs incurred by generationcompanies and are meant to allow such companies to earn a reasonable return ontheir investments in order to maintain the generation capacity necessary tosatisfy consumer demand.

 

Theelectricity markets in which we operate, with the exception of Argentina,incorporated the new reality of the international and local fuel scenario, theincreased energy demand and the electricity supply conditions into energyprices in 2003, 2004 and 2005.

 

Significantregulatory changes that have occurred during the period covered by this reportinclude:

 

InJanuary 2004, the regulation titled “Short Law” was approved by ChileanCongress and became effective as of March 2004. One of the most significantchanges implemented by Short Law included a new methodology regardingcompensation to, and expansion of, transmission systems, reducing generators’transmission costs by transferring part of the cost to final customers. It alsoreduced the regulated node price band (called Market Price Band) with respectto the free customer contract price from 10% to 5%, allowing for regulatedprices to better account for the generation costs in the system. A finalrelevant modification came from the new definition of who constituted an “unregulatedcustomer”, defined as final customers with a connected capacity equal to orgreater than 2000 kW and consumers with a connected capacity between 500 and2000 kW who choose to be unregulated consumers (effective in 2006), increasingthe potential customer base for generation companies.

 

On May19, 2005, additional modifications to Law DFL No. 1 and Law 18,410 of the SEFwere promulgated in order to encourage investment in generation (Law 20,018). Themost relevant of these modifications was the introduction of a long-term nodeprice, a stable price for long-term contracts for supplying regulatedconsumers, meant to encourage investment in generation assets by reducing theexpected volatility in the return of investments. This law also provides thatsales to distribution companies that are not made pursuant to contractualagreements already in existence be carried out until December 2008 at themarginal cost of energy and not at the node price, which reflects the real costof generating energy in Chile. The most significant change came from theredefinition of the Market Price Band, which was changed from 5% flat (reducedfrom 10% by the original Short Law) to a value that varies from 5% to 30%depending on the expected energy supply conditions of the system. Given theincrease in international fuel prices and the regular gas restrictions fromArgentina during 2005, customer contract prices did not fully reflect the costsinvolved in generating electricity. The change in the Market Price Band helpedcorrect this distortion by increasing the regulated node price.

 

Duringthe month of June 2004, the Ministry of Economy passed Public Resolution 35,which increased the number of hours considered as hours of charge loss used todetermine each power company’s capacity to supply energy in peak hours. Thischange implied booking a Ch$ 2.6 billion expense provision in 2004,affecting operating results, and also accounting for a Ch$ 15.0 billionprovision of non-operating expenses related to the resettlement of expenses forthe years from 2000 to 2003. On January 21, 2005, Endesa Chile announcedthat the Company would make the payments resulting from the resettlements,although the Company filed a demand before the Chilean Courts against the StateTreasury of Chile requesting that Public Resolution 35 be declared invalid onthe grounds that the Minister of Economy exceeded his attributions whendictating it. As of the date of the filing of this document, the demand had notyet been resolved.

 

In July 2004,Decree 5163-2004 defined a new regulatory framework for the Brazilianelectricity sector, especially affecting the commercialization of electricityand the concessions process for the entry of new power

 

76

----

 

generationplants. The new framework separates the forms of free and regulated marketcontracting, establishing that distributors make purchases through concessionsorganized by state entities. The supply of electricity generation for theseconcessions was divided into existing new energy (power plants that supplystarting in the year 2008) and assigned according to bidding processes as the onlyway to sell energy to distribution companies. Since December 9, 2004 fourexisting energy bidding processes have been held, where 19,601 average MW havebeen allocated at an average sale price that varies from R$ 57.5 per MWh,beginning in 2005, to R$ 94.6 per MWh, beginning in 2009. CachoeiraDourada participated in the second bidding process, allocating 133 average MWat R$ 83.5 per MWh beginning in 2008. The conditions of Cachoeira Dourada’scontract with its main customer CELG have not been affected by this regulatorychange. Regarding new energy, on December 16, 2005, 3,284 average MW have beenallocated at an average price of R$ 123.6 beginning in the years 2008,2009 and 2010. Because the use of such bidding processes to assign energybegins in 2008 this has not yet had an impact on the company’s results ofoperations, but the growing electricity demand and price level of the newenergy biddings represents an attractive opportunity in the Brazilian market.

 

InPeru, Supreme Decree 038-2005-EM was published on October 8, 2005, whichamended clause 124 of the Electricity Concessions Law Regulation, establishingthat the fuel price to be taken into account for the setting and updating ofthe tariff should be the lesser of the domestic market price and the weightedprice used by Osinerg. The new calculation resulted in an updated tariffdecrease of approximately 9% in local currency terms compared to the previoustariff setting in April of 2005.

 

InDecember 2004, Congress approved a bill (Law 28447) that modifies some clausesof the Electrical Concessions Law. Under this bill, the calculation horizon ofthe electricity generation tariff has been modified from four to three years(24 months forward and the 12 months prior to the calculation date). The bartariffs will be set by Osinerg annually, rather than semi-annually. Thisregulatory change did not have a material impact on Edegel’s results from 2003to 2005.

 

As aconsequence of the energy environment in 2004, which featured relatively lowhydrology and high international fuel prices, during the first semester of2004, the government required private generators to supply electricity todistributors without contracts at the regulated bar tariff, which wassignificantly lower than the alternative spot market price. The Company’s totalelectricity sales to regulated customers in Peru have remained stable atroughly one-third of total sales. Spot market prices from May 2004 untilSeptember 2004 reached 5 times the regulated tariff. In December 2004, generatorsin Peru agreed to once again supply electricity to distributors withoutcontracts at the regulated tariff set in November 2004. During 2005, thissituation continued, but due to the improved hydrology, the difference betweenthe regulated bar tariff and the spot price was not as significant as in theprevious year.

 

InArgentina, the Electricity Act Law 24,065 (see “Item 4. Information on theCompany—B. Business Overview—Electricity Generation in Argentina—IndustryStructure and Regulatory Framework” for more details) has not been formallyrepealed, but since January 2002, governmental authorities have adoptedresolutions which we consider to be extraordinary actions that have materiallyaffected the operating results of the Endesa Chile.

 

•                  InJanuary 2002, the Economic Emergency Law was passed. The Argentine peso wasdevalued against the U.S. dollar from Ar$ 1.00 per U.S.$ 1.00 toAr$ 3.37 per U.S.$ 1.00. Prior to 2002, the Argentine peso had beenpegged to the U.S. dollar at a rate of 1 Argentine peso to 1 U.S. dollar. Electricitytariffs historically were expressed in U.S. dollars at an exchange ofAr$ 1 to U.S.$ 1. After the devaluation, the Argentine governmentconverted electricity tariffs to Argentine pesos at the old exchange rate ofAr$ 1 to U.S.$ 1. As a result of this devaluation and the tariffconversion rate dictated by the Argentine government, the U.S. dollarequivalent of the Company’s Argentine revenues declined significantly.

 

•                  Thegovernment has continued to adopt resolutions to interfere with themarket-driven reactions of the industry (See “Item 4. Information on theCompany—B. Business Overview—Electricity Generation in Argentina” for details).These resolutions have affected the behavior of the industry as a whole byaffecting spot prices, contract conditions, fuel supply and prices, accountsreceivables, etc. In 2001, prior to the adoption of these resolutions, theCompany’s revenues in Argentina were Ch$ 244.3 billion.

 

Followingtheir adoption, revenues were Ch$ 105.3 billion in 2002, Ch$ 118.2billion in 2003, Ch$ 153.6 billion in 2004 and Ch$ 156.8 in 2005. In2004, the Authority began the process of adjusting the price of

 

77

----

 

natural gas in its local market and has incorporated these adjustmentsinto the calculation of the wholesale price of electricity, but has not set thetariff free to adjust according to the regulatory frameworks tariff model.

 

ThroughS.E. resolution 949/04, the Argentine authorities restricted energy exports toneighboring countries. These resolutions only allow export contracts to besatisfied with generation units that were previously identified for suchpurpose, and do not allow the purchase of any deficits in the wholesale market,notwithstanding the agreements to allow such purchases set forth in theInterconnection protocol between Argentina and Brazil. This situation broughtsevere consequences to Endesa Costanera, which in the second quarter of2005 was forced to comply with the energy export contractual obligations bydispatching energy generated through the use of fuel oil. This situationcreated an important gap between the prices in the export contracts and thecosts associated with generation due to the high costs of fuel oil in theinternational markets. Endesa Costanera’s total generation expensesincreased by 68% from 2003 to 2004 and by 28% from 2004 to 2005. A subsequentroutine maintenance procedure prevented Endesa Costanera from fullycomplying with the export contracts, which resulted in only partial payments byCIEN and CEMSA. On January 12, 2006, the board of directors ofEndesa Costanera resolved to book, as of December 31, 2005, a provision ofapproximately Ch$ 15.6 billion to cover the uncollectability risk of theaccounts receivables of CIEN and CEMSA. Operational income has reachedCh$ 28.5 billion in 2003, Ch$ 29.5 billion in 2004, andCh$ (1.9) billion in 2005, evidencing how the Argentine authorities’resolutions regarding the export business have negatively affectedEndesa Costanera’s operational results. Nevertheless, in consolidatedterms, Endesa Costanera’s operating results for 2003, 2004 and 2005 didnot substantially affect Endesa Chile’s total consolidated results, to thepercentage share of Endesa Costanera’s operations as part of Endesa Chile’stotal consolidated operating income, reaching 8% in 2003, 8% in 2004 andobtaining a negative result, in Chilean GAAP, in 2005.

 

**c.     Economic Conditions**

** **

Macroeconomicconditions in the countries in which we operate may have a significant effecton our operating results. The most significant economic variables includeeconomic growth, mainly due to its impact on electricity demand, and the localcurrency exchange rate against the U.S. dollar, which affects revenues andexpenses, as well as assets and liabilities, depending on the percentagedenominated in U.S. dollars.

 

**Economic Growth and Electricity Demand**

** **

Theeconomies of each of the countries in which we operate continued to improve in2005, which has positively affected the Company’s operating results because ofan increase in electricity demand. The GDP and electricity growth rate for theyears covered by this report are included in the following table:

 
| ** ** | ** ** | **2003**        | ** ** | **2004**                        | ** ** | **2005**        | ** ** |
|------------|------------|-----------------|------------|---------------------------------|------------|-----------------|------------|
| ** ** | ** ** | **GDP  Growth** | ** ** | **Electricity  Demand  Growth** | ** ** | **GDP  Growth** | ** ** | **Electricity  Demand  Growth** | ** ** | **GDP  Growth(1)** | ** ** | **Electricity  Demand  Growth** | ** ** |
| ** ** | ** ** | **(%)**         | ** ** | **(%)**                         | ** ** | **(%)**         | ** ** | **(%)** | ** ** | **(%)** | ** ** | **(%)** | ** ** |
| Chile      |       | 3.7             |       | 6.6                             |       | 6.1             |       | 8.0 |   | 5.9 |   | 4.0 |   |
| Argentina  |       | 5.5             |       | 8.0                             |       | 8.3             |       | 6.8 |   | 7.5 |   | 5.8 |   |
| Colombia   |       | 3.2             |       | 3.2                             |       | 3.5             |       | 2.7 |   | 4.0 |   | 3.8 |   |
| Brazil     |       | 0.1             |       | 6.6                             |       | 5.0             |       | 5.4 |   | 3.3 |   | 4.3 |   |
| Peru       |       | 4.0             |       | 5.6                             |       | 5.1             |       | 5.9 |   | 5.5 |   | 5.0 |   |

 

----

(1)   Source: World Economic Outlook (September2005) estimate of the International Monetary Fund.

 

**Local Currency Exchange Rate**

** **

Thevalue of the local currency in the countries in which we operate may have asignificant impact on our operating results and overall financial position,depending on the percentage of U.S. dollar-denominated assets, liabilities,revenues and expenses, including depreciation and interest expenses. Adevaluation or depreciation of local currencies against the U.S. dollar affectsour operating margins by increasing the value of sales denominated in U.S.dollars and the value of operating expenses, such as fuel priced in U.S.dollars, and depreciation of assets valued in U.S. dollars. Financial interestexpenses fixed in U.S. dollars also increase, as does the value of U.S.

 

78

----

 

dollar-denominated debt on thebalance sheet. Conversely, the revaluation or appreciation of local currenciesagainst the U.S. dollar affects operating margins reduces revenues denominatedin U.S. dollars when expressed in local currencies, and reduces the value ofoperating expenses denominated in U.S. dollars. Financial expenses of U.S. dollar-denominateddebt also decline.

 

As ofDecember 31, 2005, Endesa Chile had total consolidated indebtedness ofU.S.$ 3,859 million, of which U.S.$ 2,590 million, or approximately67%, was denominated in U.S. dollars, and U.S.$ 623 million wasdenominated in Chilean pesos. In addition to the U.S. dollar and the Chileanpeso, and as of December 31, 2005, our foreign-currency denominatedconsolidated indebtedness included the equivalent of U.S.$ 491 million inColombian pesos, and U.S.$ 133 million in Peruvian soles.

 

Thefollowing table includes year and average local currency U.S. dollar exchangesfor the period covered by this report.

 
| ** **                  | ** ** | **Local Currency U. S. Dollar Exchange Rates** | ** ** |
|-----------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **2003**                                                                     | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                  | ** ** | **Average**                                                                  | ** ** | **Year End** | ** ** | **Average** | ** ** | **Year End** | ** ** | **Average** | ** ** | **Year End** | ** ** |
| Chile (peso per dollar)     |       | 686.89                                                                       |       | 593.8 |   | 611.11 |   | 557.40 |   | 558.06 |   | 512.50 |   |
| Argentina (peso per dollar) |       | 2.96                                                                         |       | 2.93 |   | 2.95 |   | 2.97 |   | 2.94 |   | 3.02 |   |
| Colombia (peso per dollar)  |       | 2,876.3                                                                      |       | 2,778.0 |   | 2,628.7 |   | 2,344.5 |   | 2,321.6 |   | 2,285.0 |   |
| Brazil (reais per dollar)   |       | 3.08                                                                         |       | 2.90 |   | 2.93 |   | 2.65 |   | 2.44 |   | 2.34 |   |
| Peru (sol per dollar)       |       | 3.48                                                                         |       | 3.47 |   | 3.41 |   | 3.28 |   | 3.3 |   | 3.42 |   |

 

Forthe twelve-month period ended December 31, 2005, our revenues amounted toU.S.$ 2,191 million of which approximately 18% were denominated in U.S.dollars, and approximately 45% were linked in some way to the U.S. dollar. Onthe other hand, the equivalent of U.S.$ 99 million were revenues in pesos,the equivalent of U.S.$ 77 million in Brazilian reais, U.S.$ 278million in Colombian pesos, U.S.$ 277 million in Argentine pesos, andU.S.$ 77 million in Peruvian soles.

 

**d.     Technical Bulletin No. 64 and OtherCritical Accounting Policies**

 

***Technical Bulletin No. 64***

 

Ourconsolidation of the results of our non-Chilean subsidiaries is governed byTechnical Bulletin No. 64. Technical Bulletin No. 64 establishes a mechanism toconsolidate the financial results of a non-Chilean company, which are preparedin local GAAP and denominated in local currency, into the financial results ofits Chilean parent company, which are prepared in Chilean GAAP and denominatedin Chilean pesos. The implementation of Technical Bulletin No. 64 affects thereporting of our operating results. In particular, exchange rate variations, ifsignificant, can materially affect the amounts of operating revenues andexpenses reported in the Company’s consolidated financial statements in ChileanGAAP, as well as generate material non-operating gains and losses.

 

*TechnicalBulletin No. 64—Conversion Effect*. Technical Bulletin No. 64requires Endesa Chile to convert the financial statements of its non-Chileansubsidiaries from local currency to U.S. dollars and to restate these financialstatements into Chilean GAAP after this conversion, including converting suchU.S. dollar amounts into Chilean pesos. The gain or loss resulting from thisbalance sheet conversion is referred to as the “conversion effect.” In order toconvert monetary assets and liabilities of its non-Chilean subsidiaries to U.S.dollars, Endesa Chile must use the U.S. dollar/local currency exchange rateapplicable at period-end. In order to convert Endesa Chile’s equity interestsin such subsidiaries, as well as such subsidiaries’ non-monetary assets andliabilities, to U.S. dollars, Endesa Chile must use the U.S. dollar/localcurrency exchange rate applicable at the time when such equity interests ornon-monetary assets or liabilities were acquired or incurred. In addition,Technical Bulletin No. 64 requires income and expense accounts (except for theexpenses incurred in connection with depreciation and amortization) of foreignsubsidiaries to be converted into to U.S. dollars at the average exchange rateof the month during which such results or expenses were recorded. All amountsconverted from local currency to U.S. dollars are then converted from U.S.dollars to Chilean pesos at the exchange rate applicable at the end of thereporting period. The currency conversion can have different effects on resultswhen consolidating these figures in Chilean GAAP depending on the behavior ofthe Chilean peso in regards to the U.S. dollar. For example, a revaluation ofthe Chilean peso over

 

79

----

 

the U.S. dollar will result inthe reduction of revenues and expenses of foreign subsidiaries whenconsolidating. This effect can be compensated or aggravated depending onwhether the local exchange rate, in the markets where our internationalsubsidiaries operate, devalued or appreciated against the U.S. dollar.

 

TechnicalBulletin No. 64 may have the effect of excluding from our reported financialposition the effect on non-monetary assets of devaluation in the countries inwhich our subsidiaries and investments are located. For example, the carryingvalue of our Argentine and Brazilian non-monetary assets increased in 2002,notwithstanding the devaluation of the Argentine peso and the Brazilian real,because these assets are carried at historical U.S. dollar value and the U.S.dollar appreciated against the Chilean peso in 2002.

 

The currencyconversion from local currencies to U.S. dollars can have different effectsdepending on a foreign subsidiary’s structure of monetary and non-monetaryassets and liabilities. For example, when a foreign subsidiary has moremonetary assets than monetary liabilities, a devaluation of the applicablelocal currency against the U.S. dollar may result in a loss due to the effectsof the currency conversion. On the other hand, the appreciation of theapplicable local currency results in a gain. The reverse is also true forforeign subsidiaries with more monetary liabilities than monetary assets, wherea devaluation of the applicable local currency against the U.S. dollar mayresult in a gain, whereas an appreciation may result in a loss. The recentfluctuations of the exchange rates between the currencies of the countrieswhere we operate and the U.S. dollar, as well as in the exchange rate betweenthe Chilean peso and the U.S. dollar, have materially affected thecomparability of our results of operations during the periods discussed becauseof this conversion effect.

 

*Technical Bulletin No. 64*—*Equity Hedge*. Technical Bulletin No. 64 allows U.S.dollar-denominated debt incurred in connection with the acquisition of equityin non-Chilean subsidiaries located in unstable countries, to be hedged by theinvesting company against and limited to the book value of such equityinvestments. For purposes of Technical Bulletin No. 64, all the countries wherewe have investments—Argentina, Brazil, Colombia and Peru—are consideredunstable countries. This hedge results in the elimination of the effects ofexchange rate variations on the debt incurred in connection with suchinvestments. If the book value of an equity investment is lower than the U.S.dollar denominated debt incurred in connection with its acquisition, theresults of the exchange rate fluctuations affecting the amount of U.S. dollardenominated debt that is not hedged are included in determining net income. Onthe other hand, if the book value of an equity investment is higher than theU.S. dollar-denominated debt incurred in connection with its acquisition, thenthe results of the exchange rate fluctuations affecting the book value of theequity that is not hedged are recorded in cumulative translation adjustment ina reserve account as part of shareholders’ equity referred to as cumulativetranslation adjustment for U.S. GAAP purposes.

 

***U.S. GAAP Reconciliation***

*** ***

Ouraudited consolidated financial statements have been prepared in accordance withChilean GAAP, which differs in some significant respects from U.S. GAAP. SeeNote 32 to our audited Consolidated Financial Statements for a description ofthe principal differences between Chilean GAAP and U.S. GAAP, as well as thereconciliation to U.S. GAAP of net income and total shareholders’ equity.

 

Theprincipal differences between Chilean GAAP and U.S. GAAP as they relate to theCompany are, (i) the effects on goodwill and negative goodwill from theapplication of fair value purchase accounting, (ii) the effects of accountingfor derivatives at fair value, (iii) the effects of adjustments to U.S. GAAP inequity method investments, (iv) the effects of eliminating capitalized exchangerate differences and general and administrative expenses capitalized in fixed assets,(v) the effects of recording a liability related to minimum dividends payable,and (vi) the elimination of complementary accounts in deferred taxes as well asthe tax impact of purchase accounting.

 

The followingtable sets out the differences between consolidated net income (loss) andShareholders’ Equity as reported under Chilean GAAP and U.S. GAAP:

 

80

----

 
| ** **                                         | ** ** | **Chilean GAAP**                                                                              | ** ** | **U.S. GAAP** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                         | ** ** | **(in millions of constant Ch$ as of  December 31, 2005)** | ** ** |
| Net income (loss) for the year ended  December 31: |       |                                                                                               |       |               |       |
| 2003                                               |       | 82,967                                                                                             |       | 77,237             |       |
| 2004                                               |       | 86,805                                                                                             |       | 67,081             |       |
| 2005                                               |       | 110,623                                                                                            |       | 100,276            |       |
| Shareholders’ equity as of December 31:       |       |                                                                                               |       |               |       |
| 2003                                               |       | 1,585,065                                                                                          |       | 1,192,945          |       |
| 2004                                               |       | 1,625,378                                                                                          |       | 1,235,792          |       |
| 2005                                               |       | 1,642,259                                                                                          |       | 1,282,234          |       |

 

***Critical Accounting Policies Affecting OperatingResults***

 

Criticalaccounting policies are defined as those that are reflective of significantjudgments and uncertainties, which would potentially result in materiallydifferent results under different assumptions and conditions. We believe thatour critical accounting policies in the preparation of our Chilean GAAPfinancial statements are limited to those described below. It should be notedthat in many cases, Chilean GAAP specifically dictates the accounting treatmentof a particular transaction, with no need for management’s judgment in theirapplication. Additionally, significant differences can exist between ChileanGAAP and U.S. GAAP, as explained in “–U.S. GAAP Reconciliation” above. Thereare also areas in which management’s judgment in selecting availablealternatives would not produce materially different results. For a summary ofsignificant accounting policies and methods used in the preparation of thefinancial statements, see Note 2 to our audited consolidated financialstatements.

 

*Revenue Recognition*

* *

Inaccordance with Chilean GAAP, energy supplied and unbilled at each year-end isvalued at the selling price using the current rates and has been included inrevenue from operations. The unbilled amount is presented in current assets astrade receivables, as collection of these amounts is relatively assured and thecorresponding cost of energy purchased or produced is included in cost ofoperations. The Company recognizes revenue generated from its non-corebusinesses, such as engineering and inspection services and highway tolls, atthe time the related services are provided.

 

***Useful lives and impairment of Long-Lived Assets***

*** ***

Weestimate the useful lives of our long-lived assets and their impairmentwhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable. Factors we consider important which could trigger animpairment review include the following:

 

•                  significantunderperformance relative to expected historical or projected future operatingresults;

 

•                  significantchanges in the manner of use of the acquired assets or the strategy for ouroverall business; and

 

•                  significantnegative industry or economic trends.

 

Whenwe determine that the carrying value of long-lived assets may not berecoverable based upon the existence of one or more of the above indicators ofimpairment, we evaluate the future cash flows to determine if we need to takean impairment charge. If the sum of the expected future cash flows(undiscounted) is less than the carrying amount of the assets, we recognize animpairment loss. In order to estimate future cash flows, we must makeassumptions about future events that are highly uncertain at the time ofestimation. For example, we make assumptions and estimates about futureinterest rates, exchange rates, electricity rate increases, and cost trends,such as taxes and plant repair and maintenance. The number of years included indetermining discounted cash flow, in our opinion, is estimable in the case ofthe generating companies because the number is closely associated with theuseful lives of the plants and their equipment. These useful lives are readilydeterminable based on historical experience and type of power generated. Thediscount rates used in the analysis vary by country and fluctuate as economicconditions in these countries vary; therefore the likelihood of change inestimate in any given period is high. Adjustments to historical results basedon anticipated operating conditions are estimated in light of the current

 

81

----

 

competitive market in thecountries in which we do business. These conditions change periodically;therefore, the likelihood of a change in estimate in any given period is high. Asa result, the actual cash flows may materially differ from our estimate and wemay be required to make additional impairment charges. As of December 31, 2003,2004 and 2005, the Company assessed the impairment of long-lived assets anddetermined that there had been no indication of a potential loss on therecoverable value of investments.

 

***Impairment of Goodwill***

*** ***

Weassess the impairment of goodwill in a manner similar to that used forlong-lived assets. The measurement of the impairment loss is based on therecoverable value of the investment, which we generally determine using adiscounted cash flow approach and recent comparable transactions in the market.In order to estimate recoverable value, we must make assumptions about future eventsthat are highly uncertain at the time of estimation. The results of thisanalysis showed that the goodwill and related negative goodwill associated withinvestments in Argentina and Brazil were impaired because estimated futurediscounted cash flows were not sufficient to recover goodwill and negativegoodwill. During 2002, the Company recorded a net charge of Ch$ 65.1billion, in pesos as of December 2005, to write-off all amounts of goodwill andnegative goodwill. At a consolidated level this charge amounted toCh$ 58.7 billion, net of minority interest. As of December, 31 2003, 2004and 2005, the Company assessed the impairment of goodwill and determined thatthere had been no indication of a potential loss on the recoverable value ofinvestments.

 

***Income and Deferred Taxes***

*** ***

Inaccordance with Chilean law, the Company and each of its subsidiaries computeand pay taxes on a separate basis. We estimate our actual current tax exposurewhile assessing temporary differences resulting from differing treatment ofitems, such as depreciation, for tax and accounting purposes. These differencesresult in deferred tax assets and liabilities, which are included within ourconsolidated balance sheet. As a transitional provision under Chilean GAAP, werecorded a contra asset or liability offsetting the effects of the deferred taxassets and liabilities not recorded prior to January 1, 2000. Such contra assetor liability amounts must be amortized to income over the estimated averagereversal periods corresponding to the underlying temporary differences to whichthe deferred tax asset or liability relates, calculated using the tax rates ineffect at the time of reversal. We then assess the likelihood that our deferredtax assets will be recovered from future taxable income and to the extent webelieve that recovery is unlikely, we establish a valuation allowance. In orderfor us to estimate the realizable value of deferred tax assets and the averagereversal periods of contra assets or liabilities, we must make assumptionsabout future events that are highly uncertain at the time of estimation. Forexample, we make estimates of future earnings, including estimates of futureinterest rates, exchange rates, electricity rate increases, and cost trendssuch as taxes and plant repair and maintenance. Revisions to the estimatedrealizable value of deferred tax assets or estimated average reversal periodsof contra assets or liabilities could cause our provision for income taxes tovary significantly from period to period. The net deferred tax was a liabilityof Ch$ 35.1 billion, Ch$ 74.2 billion, and Ch$ 97.0 billion asof December 31, 2003, 2004 and 2005, respectively.

 

***Derivative Instruments***

*** ***

TheCompany has commodity derivative, financial derivative, and embedded derivativeinstruments that are recorded at fair value, with changes in fair valuerecognized in earnings under SFAS No. 133, as amended. In establishing the fairvalue of such contracts, management makes assumptions based on available marketdata and pricing models, which may change from time to time.

 

Calculationof fair value for commodity and embedded derivatives is done with internalmodels that are based primarily on discounted future cash flows. Inputs to suchmodels include estimated forward prices of electricity and natural gas,interest rates, foreign exchange rates, inflation indices, transmission costs,and others. Simulation techniques are used to forecast electricity consumptionlevels for the countries in which the Company has derivative instruments withoptions in quantities. These inputs become more difficult to predict and theestimates are less precise, the further out these estimates are made. As aresult, fair values are highly dependent upon the assumptions being used. TheCompany also adjusts fair value of certain commodity derivatives to reflectrisks related to the performance of counterparties.

 

82

----

 

TheCompany’s Argentine generation entities have access to the Brazilian energymarket through an interconnection system between the two markets. The Companyhas entered into a number of power purchase agreements on the Argentine sideand power sales agreements on the Brazilian side to export electricity fromArgentina to Brazil. In order to calculate the fair values of the electricitypurchase and sale contracts related to this interconnection business, theCompany uses, as a reference, the availability of electricity in each market inorder to comply with these sales contracts in Brazil. In the cases in which itis possible to supply these contracts from the Argentine market, we use thecurve of expected prices of electricity in this market. In the cases in whichwe believe the supply of electricity should come directly from Brazil, we haveused the Brazilian market as a reference. The Company’s assumptions include ouroutlook regarding how long the energy crisis in Argentina will last. Suchvalues are included in the reconciliation to U.S. GAAP in Note 32 (w) of theConsolidated Financial Statements.

 

TheCompany’s financial derivative instruments are primarily short duration foreigncurrency forward exchange contracts to purchase U.S. dollars or Euros andsell UF and interest swaps and dollar and cross-currency swaps. TheCompany records these financial derivative contracts at fair value. Estimatesof fair values of financial instruments for which no quoted prices or secondarymarket exists have been made using valuation techniques such as forward pricingmodels, present value of estimated future cash flows, and other modelingtechniques. These estimates of fair value include assumptions made by theCompany about market variables that may change in the future. Changes inassumptions could have a significant impact on the estimate of fair valuesdisclosed. The net asset (liability) recorded under US GAAP related tofinancial derivative instruments was Ch$ (11.3) billion andCh$ (13.1) billion as of December 31, 2004 and 2005, respectively.

 

TheCompany’s accounting policy for derivative instruments is discussed in Notes 2 (p)and 32 of our Audited Consolidated Financial Statements.

 

***Pension and Post-Retirement Benefits Liabilities***

*** ***

Wehave significant pension and post-retirement benefit plan liabilities, whichare developed from actuarial valuations. Inherent in these valuations are keyassumptions, including for example discount rates. We are required to considercurrent market conditions, including changes in interest rates, in selectingthese assumptions. Changes in the related pension and post-retirement benefitliabilities may occur in the future due to changes resulting from fluctuationsin our related headcount or to changes in the assumptions. The net pension andpost-retirement liability recorded under U.S. GAAP was, Ch$ 30.6 billion,and Ch$ 28.2 billion as of December 31, 2004 and 2005, respectively.

 

Thefollowing table shows the effect of a 1% reduction in discount rate on ourprojected benefit obligation for the periods indicated.

 
| ** **                   | ** ** | **Year ended December 31,**                  | ** ** |
|------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                   | ** ** | **2004**                                                    | ** ** | **2005** | ** ** |
| ** **                   | ** ** | **(increase in millions of Ch$ )** | ** ** |
| Projected benefit obligation |       | 1,871                                                       |       | 1,695 |   |

 

Thefollowing table shows the effect of a 1% reduction in discount rate on ouraccumulated post-retirement benefit obligation for the periods indicated.

 
| ** **                                      | ** ** | **Year ended December 31,**                  | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2004**                                                    | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(increase in millions of Ch$ )** | ** ** |
| Accumulated post-retirement benefit  obligation |       | 623                                                         |       | 767 |   |

 

**2.     Overview of Yearly Results**

 

**a.     Consolidated Comparative for the Period2003-2005**

 

Total revenuesin 2005 increased to Ch$ 1,123.0 billion, 5.0% greater than in 2004 afterincreasing 10.2% in 2004 as compared to 2003. Consolidated physical salesincreased by 4.6% in 2005 and 5.5% in 2004. The 5.0%

 

83

----

 

increasein revenues during this period was mainly due to higher sales revenues in Chileresulting from higher physical sales and a better pricing environment. During2005, the year end appreciation of the Chilean peso to U.S. dollar exchangerate was 8.1%, negatively affecting revenues from foreign operations althoughpartly offset by the 16.8% yearly average appreciation of the Brazilian reaisand 11.7% yearly average appreciation of the Colombian peso, which favoredresults when expressed in Chilean GAAP. The 9.5% increase in revenues during2004 was due to the increased price of electricity in every country, with theexception of Argentina, as a reaction to the international fuel scenario andthe increase in electricity demand, which additionally led to greater physicalsales. In 2004, the appreciation of the Chilean peso to U.S. dollar exchangerate was 6%, partly offset by the 8.6% yearly average appreciation of theColombian peso and 4.9% average appreciation of the Brazilian reais, whichfavored results when expressed in Chilean GAAP.

 

Operatingexpenses increased 5.8% in 2005 after increasing 11.4% in 2004 as compared to2003. Electricity generation increased by 5.8% in 2005 and 11.1% in 2004. Theincrease of operating expenses during 2005 was due to the increase in thermalgeneration in Argentina using liquid fuel at high international prices linkedto the dispatch of the interconnection lines to Brazil. In Chile, poorhydrology during the first half of 2005 also contributed to higher operatingexpenses. This translated into an increase in the variable costs in Argentinaand Chile. In 2004, the increase in operating expenses was due to greaterthermal generation, accentuated by the natural gas crisis in Argentina and theinternational price of alternative fuel.

 

Operatingincome increased to Ch$ 394.9 billion in 2005, compared to Ch$ 382.3billion in 2004 or an increase of 3.3%, and Ch$ 359.5 billion in 2003 oran increase of 6.4%. The Ch$ 12.6 billion increase in operating income in2005 compared to 2004 was mainly due to the Ch$ 33.9 billion increase inoperating income in Chile, offset by lower operating income of Ch$ 22.7billion in Argentina. The Ch$ 22.8 billion increase in operating income in2004 compared to 2003 was mainly due to the Ch$ 31.4 billion increase inoperating income of Colombia, offset by lower operating income of Ch$ 11.1billion in Peru. The most significant factors effecting these results were:

 

•                  thecomplicated fuel scenario in 2004 and 2005 along with the hydro conditions inthe countries in which we operate,

 

•                  theCompany’s generation capacity which allowed it to translate greater demand intogreater volume sales,

 

•                  thecongruent (but lagging) reaction of electricity prices to market conditions,

 

•                  theimpact of greater electricity demand,

 

•                  theCompany’s commercial strategy determining the level of contracted versus spotmarket sales which, from 2003 to 2005 has gradually reduced the need to makeenergy purchases, and

 

•                  theexchange differences.

 

TheCompany’s consolidated net income after taxes and minority interests in 2005reached Ch$ 110.6 billion compared to Ch$ 86.8 billion in 2004 andCh$ 83.0 billion in 2003. In 2005, income before taxes and minorityinterest of Endesa Chile rose by 13.5% over 2004 to Ch$ 239.7 billion,Ch$ 28.5 billion higher than the previous year. Non-operating resultspositively affected net income for 2005, including a Ch$ 20.7 billionreduction in financial expenses. Income taxes as of December 31, 2005, amountedto Ch$ 92.0 billion compared to Ch$ 96.8 billion at December 31, 2004.Total income tax booked in 2004 was greater than 2005, despite greater taxableincome in 2005, as a consequence of greater deferred taxes in 2004. In 2004,income before taxes and minority interest of Endesa Chile rose by 25% over 2003to Ch$ 211.3 billion, Ch$ 41.9 billion higher than the prior year. Thenon-operating result also positively affected net income for 2004, whencompared to 2003, as a result of a Ch$ 17.3 billion reduction in financialexpenses. Income taxes as of December 31, 2004 amounted to Ch$ 96.8billion compared to Ch$ 29.1 billion at December 31, 2003, a differenceproduced mainly by an increase in deferred taxes as a result of the effects ofthe tax losses caused by the devaluation of the Argentine peso in 2002.

 

84

----

 

**3.**              Country by CountryComparative Analysis of Operating Results and Details of Non-Operating Figures2004 vs. 2005

** **

***Revenues from operations***

*** ***

Revenuesfrom sales in Chile accounted for 48.8% and 45.3% of our consolidated revenuesin 2005 and 2004, respectively. Revenues from sales of electricity in Argentinaaccounted for 14.0% of our consolidated revenues in 2005 as compared to 14.4%in 2004. Revenues from sales of electricity in Colombia accounted for 23.0% ofour consolidated revenues in 2005 as compared to 24.3% in 2004 and revenuesfrom sales of electricity in Brazil accounted for 3.7% of our consolidatedrevenues in 2005 as compared to 4.1% in 2004. Revenues from sales ofelectricity in Peru accounted for 10.5% of our consolidated revenues in 2005 ascompared to 11.9% in 2004. Other, non-core business revenues accounted for lessthan 5% of total consolidated revenues in both 2005 and 2004.

 

Thetables below set forth the breakdown by country of Endesa Chile’s totalrevenues from operations and volume of GWh sales for 2004 and 2005, and thepercentage change from year to year:

 
| ** **               | ** ** | **Year ended December 31,**                                                                                       | ** ** |
|--------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **               | ** ** | **2004**                                                                                                                         | ** ** | **2005** | ** ** | **% Change** | ** ** |
| ** **               | ** ** | **(in millions of constant Ch$ as of December 31, 2005,  except percentages)** | ** ** |
| Revenues Chile           |       | 484,416                                                                                                                          |       | 548,028 |   | 13.1 |   |
| Revenues Argentina       |       | 153,638                                                                                                                          |       | 156,795 |   | 2.1 |   |
| Revenues Colombia        |       | 260,448                                                                                                                          |       | 258,758 |   | (0.6 | ) |
| Revenues Brazil (*)      |       | 43,518                                                                                                                           |       | 41,795 |   | 4.0 |   |
| Revenues Peru            |       | 127,817                                                                                                                          |       | 117,663 |   | (7.9 | ) |
| Total Revenues           |       | 1,069,837                                                                                                                        |       | 1,123,039 |   | 5.0 |   |
|                     |       |                                                                                                                             |       |   |   |   |   |
| ** **               | ** ** | **Year ended December 31,**                                                                                                      | ** ** |
| ** **               | ** ** | **2004**                                                                                                                         | ** ** | **2005** | ** ** | **% Change** | ** ** |
| ** **               | ** ** | **(GWh)**                                                                                                                        | ** ** | **(GWh)** | ** ** | ** ** | ** ** |
| Energy Sales (Chile)     |       | 18,462                                                                                                                           |       | 20,730 |   | 12.3 |   |
| Energy Sales (Argentina) |       | 11,603                                                                                                                           |       | 12,579 |   | 8.4 |   |
| Energy Sales (Colombia)  |       | 15,148                                                                                                                           |       | 15,078 |   | (0.5 | ) |
| Energy Sales (Brazil*)   |       | 3,902                                                                                                                            |       | 2,897 |   | (25.7 | ) |
| Energy Sales (Peru)      |       | 4,328                                                                                                                            |       | 4,600 |   | 6.3 |   |
| Total                    |       | 53,443                                                                                                                           |       | 55,884 |   | 4.6 |   |

 

----

(*)   Tables includefigures of Cachoeira Dourada from January 1 to September 30, 2005, when EndesaChile contributed its investments in this company to Endesa Brasil. See “Item4. Information on the Company—A. History and Development of the Company” fordetails.

 

Totalrevenues in Chile during 2005 increased by 13.1%, from Ch$ 484.4 billionto Ch$ 548.0 billion, as a result of an increase in physical sales andstable electricity prices. The favorable hydrology in the second half of theyear, especially during the June-September, allowed the company to increasephysical sales from hydro generation. Physical energy sales of the company inChile amounted to 20,731 GWh, equivalent to 12.3% growth over 2004. Theincrease in electricity sales reflected a 0.3% increase in the average salesprice, from Ch$ 24.7 per kWh in 2004 to Ch$ 24.8 per kWh in 2005, dueto increases in the regulated node price and the average spot market price.

 

Revenuesin Argentina increased by 2.1%, from Ch$ 153.6 billion in 2004 toCh$ 156.8 billion in 2005. Physical energy sales of El Chocónamounted to 4,113 GWh in 2005, a 13.3 % increase over the previous year due toimproved hydrology. Physical energy sales volumes of Endesa Costaneraincreased by 6.2% during 2005, reaching 8,466 GWh, compared to 7,973 GWh theprevious year, due to greater electricity demand and its ability to generatewith liquid fuels. The positive factors were offset in part by a 4.6% decreasein revenues of Endesa Costanera to Ch$ 117.3 billion. The lower levelof revenues was mainly explained by the reduction of

 

85

----

 

billings on the export businessto Brazil, as a consequence of Endesa Costanera’s inability to completelyfulfill its contractual commitment to these customers. (See Item 4. Informationon the Company—B. Business Overview—Operations in Argentina). The Company’saverage sales price in Argentina expressed in Chilean pesos, in accordance withTechnical Bulletin No. 64, decreased 5.9%, from Ch$ 13.2 per kWh in 2004to Ch$ 12.5 per KWh in 2005. However, when expressed in Argentine localcurrency, the average sales price increased 5.2% in 2005, due to an increase inthe wholesale market spot price.

 

Revenuesin Colombia decreased slightly by 0.6%, from Ch$ 260.4 billion in 2004 toCh$ 258.8 billion in 2005. Revenues of Emgesa declined by Ch$ 3.5billion compared to the previous year, principally due to a 2.0% fall inphysical energy sales because of lower hydrology. The lower revenues of Emgesawere partially offset by Ch$ 1.8 billion increase in revenues of Betaniadue to 13.4% increase in production compared to 2004, which enabled it toincrease its physical energy sales by 8.0%. The average sales price decreased0.3%, from Ch$ 17.2 per kWh in 2004 to Ch$ 17.1 per kWh in 2005,expressed in Chilean pesos, in accordance with Technical Bulletin No. 64. Whenexpressed in local currency, the nominal average sales price decrease was 1.2% in2005.

 

Revenuesfrom our former subsidiary Cachoeira Dourada, were obtained from consolidatedresults of only the period from January – September of 2005 as a consequence ofthe ceased consolidation of Cachoeira Dourada on October 1, 2005. Nine-month revenuesfor 2005, Ch$ 41.8 billion, represented only a 4.0% decrease compared totwelve-month revenues for 2004, which were Ch$ 43.5 billion. This wasmainly due to a favorable hydrology in the southeast-center west region in2005, as well as due to higher average sales prices. The Company’s overallaverage sales price increased 29.3% from Ch$ 11.2 per kWh in 2004 toCh$ 14.4 per kWh in 2005, expressed in Chilean pesos according to theconvention of Technical Bulletin No. 64. In Brazilian local currency, theCompany’s average sales price increased by 11.4% during 2005.

 

Revenuesfrom sales of our Peruvian electricity generation company, Edegel, decreased by7.9%, from Ch$ 127.8 billion in 2004 to Ch$ 117.7 billion in 2005,mainly due to a lower average electricity sales price, offset by an increase inphysical sales of 9.2% due to greater demand and better hydrology. The averagesales price decreased from Ch$ 29.3 per kWh in 2004 to Ch$ 25.2 perkWh in 2005, equivalent to a 13.8% decrease, expressed in Chilean pesosaccording to the convention of Technical Bulletin No. 64. The nominal averagesales price decrease in local currency was 3.3% in 2005.

 

***Cost of operations***

 

Thetable below sets forth the breakdown by country of costs of operations for 2004and 2005 and the percentage change from year to year:

 
| ** **                     | ** ** | **Year ended December 31,**                                                                                       | ** ** |
|--------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2004**                                                                                                                         | ** ** | **2005** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | **(in millions of constant Ch$ as of December 31, 2005,  except percentages)** | ** ** |
| Cost of Operations (1)         |       |                                                                                                                             |       |   |   |   |   |
| Cost of operations (Chile)     |       | 309,688                                                                                                                          |       | 340,294 |   | 9.9 |   |
| Cost of operations (Argentina) |       | 115,360                                                                                                                          |       | 141,254 |   | 22.4 |   |
| Cost of operations (Colombia)  |       | 133,834                                                                                                                          |       | 133,028 |   | (0.6 | ) |
| Cost of operations (Brazil)    |       | 26,885                                                                                                                           |       | 19,618 |   | (27.0 | ) |
| Cost of operations (Peru)      |       | 66,075                                                                                                                           |       | 55,405 |   | (16.1 | ) |
| Total                          |       | 651,842                                                                                                                          |       | 689,599 |   | 5.8 |   |

 

----

(1)          excludesSG&A expenses

 

Operatingcosts in Chile increased 9.9% in 2005 when compared to 2004, primarily due togreater thermal generation fuel expenses and electricity purchases resultingfrom the delayed rainy season in Chile that finally began in June. The averagevariable cost of generation, excluding electricity purchases, decreased 4.4% toCh$ 8.8 per kWh in 2005 from Ch$ 9.2 per kWh in 2004, because of26.5% increased hydro generation in Chile. Cost of electricity purchases, bothin terms of energy and capacity, increased from Ch$ 55.0 billion in 2004to Ch$ 65.0 billion in 2005, mainly due to an increase of 18.5% inphysical GWh purchases, while the average purchase cost

 

86

----

 

price went from Ch$ 28.7in 2004 to Ch$ 28.6 in 2005. Depreciation of assets held in Chile,increased from Ch$ 68.0 billion in 2004 to Ch$ 76.9 billion in 2005,mainly as a consequence of 12 months of Rulco depreciation in 2005, compared to3 months in 2004.

 

Costsof operations in Argentina increased Ch$ 25.9 billion to Ch$ 141.3billion in 2005 from Ch$ 115.4 billion in 2004. Thermal and hydrogeneration increased 6.9% and 14.6%, respectively. Cost of fuel increased byCh$ 25.7 billion, caused mainly by generating energy using liquid fuels(fuel oil), and were the main reason for the increase in costs in Argentina. Increaseduse of liquid fuels was caused by the shortage of natural gas in Argentina. Theaverage variable cost of generation, excluding the cost of electricitypurchases, increased from Ch$ 5.9 per kWh in 2004 to Ch$ 7.7 per kWhin 2005 due to the higher cost of fuel. Electricity purchases, both in energyand capacity, decreased Ch$ 1.5 billion during 2005 mainly due to adecrease in the average purchase cost price, which went from Ch$ 19.4 in2004 to Ch$ 14.7 in 2005. Asset depreciation declined 9.3%. Theappreciation of the Chilean peso in terms of the U.S. dollar reduced totaloperating expenses in 2005 when compared to 2004 by Ch$ 13.1 billion. Theaverage Argentine peso to U.S. dollar exchange rate remained stable in 2005,not significantly impacting operating expenses.

 

Costsof operations in Colombia decreased slightly by 0.6% to Ch$ 133.0 billionin 2005 from Ch$ 133.8 billion in 2004. Tolls and energy transportationcosts increased Ch$ 5.8 billion because of an increase in the averagevariable cost of generation, which excluding the cost of energy purchases,increased from Ch$ 4.4 per KWh in 2004 to Ch$ 5.0 per KWh in 2005. Electricitypurchases, both energy and capacity, decreased Ch$ 4.5 billion during 2005mainly due to a decrease in the average purchase cost price, which went fromCh$ 10.3 in 2004 to Ch$ 9.1 in 2005. This explained the reduction incost of electricity purchases of Ch$ 4.5 billion, which offset in part theincreased costs. Asset depreciation declined 11.4%. The appreciation of theChilean peso in terms of the U.S. dollar reduced total operating expenses byCh$ 15.1 billion in 2005 when compared to 2004, while the 11.7% appreciationof the Colombian peso in terms of the U.S. dollar exercised an increasingimpact on expenses.

 

Costsof operations in Brazil decreased by 27.0%, to Ch$ 19.6 billion in 2005from Ch$ 26.9 billion in 2004, principally reflecting the disposition ofCachoeira Dourada on October 1, 2005. Not accounting for the disposition ofCachoeira Dourada, when comparing the first nine months of each year, costs ofoperations in September 2005 when compared to September 2004 also decreased,but in a lower degree, by 4.7%. The reduction in operating expenses ofCachoeira Dourada are mainly explained by greater hydrology in 2005 compared to2004, allowing us to reduce electricity purchases from other generators as wellas a reduction due to depreciation. Asset depreciation declined 31.2% inDecember 2005 and declined 15% when comparing September 2005 to September 2004,strongly impacted by the revaluation of the Brazilian reais and the Chileanpeso. The appreciation of the Chilean peso in terms of the U.S. dollar reducedtotal operating expenses in 2005 when compared to 2004 by Ch$ 3.0 billion.The average 2005 appreciation of the reais to U.S. dollar exchange rate was16.8%.

 

Costsof operations in Peru decreased by 16.1% to Ch$ 55.4 billion in 2005 fromCh$ 66.1 billion in 2004, mainly due to lower fuel costs and reducedpurchases of electricity and also due to the use of natural gas from Camiseainstead of diesel, which permitted thermal electricity to be generated at amuch lower variable cost. The average variable cost of generation per kWh,excluding electricity purchases, was Ch$ 5.8 in 2005 compared toCh$ 7.9 in 2004. Electricity purchases, both energy and capacity,decreased Ch$ 2.3 billion during 2005 mainly due to a decrease in theaverage purchase cost price, which went from Ch$ 32.6 in 2004 toCh$ 22.3 in 2005. The cost of asset depreciation declined 10.0%. Theappreciation of the Chilean peso in terms of the U.S. dollar reduced totaloperating expenses by Ch$ 7.4 billion in 2005 when compared to 2004, whilethe 3.4% averaged appreciation of the average Peruvian Sol to U.S. dollarexchange rate in 2005 partially offset this effect.

 

***Administrative and selling expenses***

*** ***

Administrativeand selling expenses increased by 8.1% to Ch$ 38.6 billion in 2005 fromCh$ 35.7 billion in 2004.

 

The tablebelow sets forth the breakdown of selling and administrative expenses for 2004and 2005 and the percentage change from year to year:

 

87

----

 
| ** **                               | ** ** | **Year ended December 31,**                                                                                      | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2004**                                                                                                                        | ** ** | **2005** | ** ** | **% Change** | ** ** |
| ** **                               | ** ** | **(in millions of constant Ch$ as or December 31, 2005  except percentages)** | ** ** |
| Administrative and Selling Expenses      |       |                                                                                                                            |       |   |   |   |   |
| In Chile                                 |       | 19,620                                                                                                                          |       | 18,726 |   | (4.6 | ) |
| In Argentina                             |       | 2,662                                                                                                                           |       | 2,628 |   | (1.3 | ) |
| In Colombia                              |       | 3,894                                                                                                                           |       | 5,181 |   | 33.1 |   |
| In Brazil                                |       | 1,804                                                                                                                           |       | 3,608 |   | 100.0 |   |
| In Peru                                  |       | 7,706                                                                                                                           |       | 8,434 |   | 9.4 |   |
| Total Selling and Administrative Expense |       | 35,686                                                                                                                          |       | 38,577 |   | 8.1 |   |

 

Themost relevant factors in this increase in selling and administrative expenseswere the greater costs of personnel in Colombia and in Brazil, due to anincrease related to the write off of past due billings to CELG, which accruedprior to reaching a new contractual agreement with this customer in 2004. Fordetails on this agreement, see Item 4B—Business Overview—Operations in Brazil.

 

***Operating Margin and Operating Income***

 

Ouroperating margin, that is, operating income as a percentage of revenues,declined from 35.7% in 2004 to 35.2% in 2005. This slight reduction isexplained mainly by a lower operating margin in Argentina, offset in part byimproved margins in Chile, Brazil and Peru.

 
| ** **                    | ** ** | **Year ended December 31,**                                                                                                      | ** ** |
|-------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                    | ** ** | **2004**                                                                                                                                        | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **(based on figures in Chilean  GAAP in millions of Ch$ as of  December 31, 2005)** | ** ** |
| Operating Margin (Chile)      |       | 32.0                                                                                                                                            | %          | 34.5 | % |
| Operating Margin (Argentina)  |       | 23.2                                                                                                                                            | %          | 8.2 | % |
| Operating Margin (Colombia)   |       | 47.1                                                                                                                                            | %          | 46.6 | % |
| Operating Margin (Brazil)     |       | 34.1                                                                                                                                            | %          | 44.4 | % |
| Operating Margin (Peru)       |       | 42.3                                                                                                                                            | %          | 45.7 | % |
| Consolidated Operating Margin |       | 35.7                                                                                                                                            | %          | 35.2 | % |

 

EndesaChile’s consolidated operating income, the result of subtracting totaloperating expenses, including selling and administrative expenses (SG&A),from operation revenues, reached Ch$ 394.9 billion for 2005 compared toCh$ 382.3 billion for 2004. The following table breaks down operatingincome by country for the years ended December 31, 2004 and 2005:

 
| ** **                   | ** ** | **Year ended December 31,**                                                                                       | ** ** |
|------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **2004**                                                                                                                         | ** ** | **2005** | ** ** | **% Change** | ** ** |
| ** **                   | ** ** | **(in millions of constant Ch$ as of December 31, 2005,  except percentages)** | ** ** |
| Operating Income (Chile)     |       | 155,108                                                                                                                          |       | 189,008 |   | 21.9 |   |
| Operating Income (Argentina) |       | 35,616                                                                                                                           |       | 12,913 |   | (63.7 | ) |
| Operating Income (Colombia)  |       | 122,721                                                                                                                          |       | 120,548 |   | (1.8 | ) |
| Operating Income (Brazil)    |       | 14,829                                                                                                                           |       | 18,570 |   | 25.2 |   |
| Operating Income (Peru)      |       | 54,035                                                                                                                           |       | 53,823 |   | (0.4 | ) |
| Total                        |       | 382,309                                                                                                                          |       | 394,862 |   | 3.3 |   |

 

Due tofavorable hydrology in Chile in the second half of the year, especially duringthe June-September period, operating margin and income increased as a result ofincreased physical sales and stable prices, which was partially offset byincreased fuel costs and energy purchase costs during the first half of 2005.

 

88

----

 

Theeffect of the appreciation of the Chilean peso on revenues and expensesnegatively affected margins because revenues from foreign subsidiaries weretranslated into Chilean pesos, according to Technical Bulletin No. 64, at alower year-end exchange rate in 2005 than in 2004. Additionally, the positiveeffect of this appreciation on fuel prices was offset by the stronger impact onprices of the gas crisis in Argentina and the higher level of internationalfuel prices, which are denominated in U.S. dollars.

 

Operatingmargins and operating income in Argentina declined, mainly as a result ofoperations of subsidiary Endesa Costanera, which produced a negativecontribution to the operating income of Endesa Chile of Ch$1.9 billioncompared to income of Ch$29.5 billion in 2004, although under Argentine GAAP itshows an operating gain. The Ch$31.4 billion decrease in operating results ofEndesa Costanera in 2005 is mainly explained by lower export marginsrelated to the interconnection lines to Brazil. The El Chocónhydroelectric plant’s increased operating income of Ch$8.7 billion, whichresulted from better hydrology and rise in energy sales due to higher naturalgas prices on the wholesale market, partially offset the reduced operatingresults of Endesa Costanera.

 

Operatingmargins and operating income in Brazil increased because commercial and marketconditions, that is electricity demand, level of prices and hydrology, werefavorable for Cachoeira during 2005. Operating income for the first nine monthsof 2005 was 25.2% higher than the the entire year of 2004, reaching Ch$18.6billion for the nine-month period in 2005, compared to Ch$14.8 billion for allof 2004.

 

InColombia, operating margins and operating income decreased, mainly due to lowerhydrology that predominated during the year in the Guavio zone and forcedEmgesa to reduce its hydroelectric generation by 4.3 % compared to 2004 and toincrease its thermal generation. The Betania hydro plant increased itshydroelectric generation by 13.4 %, although this was offset by a 67.0%increase in electricity purchase costs. Operating income from Emgesa slightlydecreased from Ch$ 104.5 billion in 2004 to Ch$ 103.8 billion in 2005and operating income from Betania decreased from Ch$ 18.2 billion in 2004to Ch$ 16.8 billion in 2005.

 

Edegel,in Peru, registered higher operating margins and a lower operating income. Thelower operating income was mainly due to a 13.8% lower average sales price,offset by 6.3% higher physical energy sales from 4,328 GWh in 2004 to 4,600 GWhin 2005. The impact in operating income was a reduction from Ch$ 54.0billion in 2004 to Ch$ 53.8 billion in 2005. Furthermore, in consolidatedterms, Edegel’s lower operating results for 2005, did not substantially affectEndesa Chile’s total consolidated results, due to the percentage share ofEdegel’s operations as part of Endesa Chile’s total consolidated operations of13.6%.

 

***Non-operating Results***

 

Thefollowing table sets forth certain information regarding our non-operatingresults for each of the periods indicated:

 
| ** **                                    | ** ** | **Year ended December 31,**                                                                                       | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                                                                                                         | ** ** | **2005** | ** ** | **% Change** | ** ** |
| ** **                                    | ** ** | **(in millions of constant Ch$ as of December 31, 2005,  except percentages)** | ** ** |
| **Non-operating income:**                     |       |                                                                                                                             |       |   |   |   |   |
| Interest earned                               |       | 15,449                                                                                                                           |       | 15,552 |   | 0.7 |   |
| Equity income of non-consolidated  affiliates |       | 19,984                                                                                                                           |       | 21,374 |   | 7.0 |   |
| Other non-operating income                    |       | 53,087                                                                                                                           |       | 33,280 |   | (37.3 | ) |
| **Non-operating expenses:**                   |       |                                                                                                                             |       |   |   |   |   |
| Interest expense                              |       | 199,490                                                                                                                          |       | 178,794 |   | (10.4 | ) |
| Equity losses of non-consolidated  affiliates |       | 90                                                                                                                               |       | 7,805 |   | 8,625.1 |   |
| Goodwill amortization                         |       | 1,516                                                                                                                            |       | 1,366 |   | (9.9 | ) |
| Other non-operating expenses                  |       | 82,140                                                                                                                           |       | 53,586 |   | (34.8 | ) |
| **Monetary correction:**                      |       |                                                                                                                             |       |   |   |   |   |
| Price level restatement                       |       | 2,291                                                                                                                            |       | 1,318 |   | (42.5 | ) |
| Foreign Exchange translation                  |       | 21,373                                                                                                                           |       | 14,901 |   | (30.3 | ) |
| **Non-operating results**                     |       | (171,052                                                                                                                         | )          | (155,126 | ) | (9.3 | ) |

 

89

----

 

Non-operatingresults amounted to a loss of Ch$ 155.1 billion in 2005 compared to a lossof Ch$ 171.1 billion in 2004, a Ch$ 15.9 billion reduction in losses.The most important factors leading to this reduction include:

 

•                  consolidatedinterest expenses reduced by Ch$ 20.7 billion, from Ch$ 199.5 billionin 2004 to Ch$ 178.8 billion in 2005, as a result of reduced debt and theappreciation of the Chilean peso against the U.S. dollar. Higher average cashbalances also increased interest income by Ch$ 0.1 billion, fromCh$ 15.4 billion to Ch$ 15.5 billion.

 

•                  netother non-operating income and expenses show an improved result of Ch$ 8.7billion, mainly explained by Ch$ 24.5 billion of improvement from theconversion adjustment (Technical Bulletin No. 64 of the Chilean Institute ofAccountants) of our foreign subsidiaries, principally the Colombian companiesEmgesa and Betania, the former Brazilian subsidiary Cachoeira Dourada S.A.and the Peruvian subsidiary Edegel S.A.A., and by Ch$ 13.2 billion oflower provisions for the re-settlement of energy and capacity, which werepartially offset by Ch$ 20.9 billion of higher provisions forcontingencies and litigation and Ch$ 7.2 billion of reduced results fromthe liquidation of swap contracts.

 

***Net income***

 

Thefollowing table sets forth our net income for the periods indicated:

 
| ** **                                                                         | ** ** | **Year ended December 31,**                                                                                       | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                                                                                                                         | ** ** | **2005** | ** ** | **% Change** | ** ** |
| ** **                                                                         | ** ** | **(in millions of constant Ch$ as of December 31, 2005,  except percentages)** | ** ** |
| Operating income                                                                   |       | 382,310                                                                                                                          |       | 394,862 |   | 3.3 |   |
| Non-operating income                                                               |       | (171,052                                                                                                                         | )          | (155,126 | ) | (9.3 | ) |
| **Net income before taxes, minority interest  and negative goodwill amortization** | ** ** | **211,257**                                                                                                                      | ** ** | **239,736** | ** ** | **13.5** | ** ** |
| Income tax                                                                         |       | (54,678                                                                                                                          | )          | (60,140 | ) | 9.9 |   |
| Deferred taxes                                                                     |       | (42,112                                                                                                                          | )          | (31,814 | ) | (24.5 | ) |
| **Total income taxes**                                                             | ** ** | **(96,790**                                                                                                                      | **)**      | **(91,954** | **)** | **(5.0** | **)** |
| Minority interest                                                                  |       | (44,343                                                                                                                          | )          | (52,469 | ) | 18.3 |   |
| Amortization of negative goodwill                                                  |       | 16,681                                                                                                                           |       | 15,310 |   | (8.2 | ) |
| Extraordinary items                                                                |       | 0                                                                                                                                |       | 0 |   | n.a. |   |
| **Net income**                                                                     | ** ** | **86,805**                                                                                                                       | ** ** | **110,623** | ** ** | **27.4** | ** ** |

 

*IncomeTaxes*. Current income tax and deferred taxes declined by Ch$ 4.8billion compared to 2004. Consolidated income taxes amounted to Ch$ 92.0billion in 2005, composed of a charge of Ch$ 60.1 billion for incometaxes, an increase of Ch$ 5.5 billion over 2004 related to higher taxableincome, and Ch$ 31.8 billion of deferred taxes, which fell by Ch$ 10.3billion from 2004. The lower charge for deferred taxes in 2005 is mainlyexplained by Ch$ 11.8 billion for Endesa Costanera and Ch$ 9.5billion for Edegel due to the legal agreement achieved in the SUNAT income taxassessment (see “Item 8. Financial Information – A. Consolidated Statements andOther Financial Information – Legal Proceedings”), offset by Ch$ 8.7billion for Endesa Chile (the parent company).

 

*MinorityInterest*. Minority interest expenses increased Ch$ 8.1billion in 2005, mainly due to higher net income of our subsidiaries inColombia and Peru, partially offset by lower net income of San Isidro in Chile.

 

**4.**              Country by CountryComparative Analysis of Operating Results and Details of Non Operating Figures2004 vs. 2003

 

***Revenues fromoperations***

 

Revenues from sales in Chile accounted for 45.3% and49.8% of our consolidated revenues in 2004 and 2003, respectively.  Revenues from sales of electricity inArgentina accounted for 14.4% of our consolidated revenues in 2004 as comparedto 12.1% in 2003.  Revenues from sales ofelectricity in Colombia accounted for 24.3% in 2004

 

90

----

 

as compared to 22.6% in 2003 and revenues from sales of electricity inBrazil accounted for 4.1% in 2004 as compared to 3.3% in 2003.  In addition, revenues from sales ofelectricity in Peru accounted for 11.9% in 2004 as compared to 12.1% in2003.  Other, non-core business revenuesaccounted for less than 5% of total consolidated revenues in both 2003 and2004.

 

The tables below set forth the breakdown by country ofEndesa Chile’s total revenues from operations and volume of GWh sales for 2003and 2004, and the percentage change from year to year:

 
| ** **         | ** ** | **Year ended December 31,**                                                          | ** ** |
|--------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | **2003**                                                                                  | ** ** | **2004** | ** ** | **% Change** | ** ** |
| ** **         | ** ** | **(in millions of constant Ch$ as  of December 31, 2004,  except percentages)** | ** ** |
| Revenues Chile     |       | 486,220                                                                                   |       | 484,416 |   | (0.4 | ) |
| Revenues Argentina |       | 118,167                                                                                   |       | 153,638 |   | 30.0 |   |
| Revenues Colombia  |       | 221,507                                                                                   |       | 260,448 |   | 17.6 |   |
| Revenues Brazil    |       | 32,698                                                                                    |       | 43,518 |   | 33.1 |   |
| Revenues Peru      |       | 118,655                                                                                   |       | 127,817 |   | 7.7 |   |
| Total Revenues     |       | 977,247                                                                                   |       | 1,069,837 |   | 9.5 |   |

 
| ** **               | ** ** | **Year ended December 31,** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **2003**                         | ** ** | **2004** | ** ** | **% Change** | ** ** |
| ** **               | ** ** | **(GWh)**                        | ** ** | **(GWh)** | ** ** | ** ** | ** ** |
| Energy Sales (Chile)     |       | 18,681                           |       | 18,462 |   | (1.2 | ) |
| Energy Sales (Argentina) |       | 9,259                            |       | 11,603 |   | 25.3 |   |
| Energy Sales (Colombia)  |       | 14,481                           |       | 15,148 |   | 4.6 |   |
| Energy Sales (Brazil)    |       | 3,770                            |       | 3,902 |   | 3.5 |   |
| Energy Sales (Peru)      |       | 4,443                            |       | 4,328 |   | (2.6 | ) |
| Total                    |       | 50,634                           |       | 53,443 |   | 5.5 |   |

 

Total revenues in Chile decreased 0.4% in 2004 due tolower sales of non generation businesses mainly at Ingendesa, our engineeringservices subsidiary in Chile.  Revenuesfrom sales of electricity increased by 0.2% to Ch$ 456.6 billion in 2004from Ch$ 455.7 billion in 2003.  Theincrease in electricity sales reflected a 1.4% increase in the average salesprice, from Ch$ 24.4 per kWh in 2003 to Ch$ 24.7 per kWh in 2004,affected by the increase in the regulated node price and the average spotmarket price.  The price increase effectwas offset by the reduced volume of electricity sales, which declined 1.2% in2004.  The lower level of volume saleswas a consequence of the level of contractual commitments and hydrology.  The lower hydro generation due to the levelof hydrology in reservoirs and rivers was partly offset by thermal generationand the successful start-up of the 690 MW Ralco power plant, which beganoperations in September 2004 and supplied nearly 1,300 GWh at December 31,2004.  Spot market GWh sales increased9.3% from 2,920 GWh in 2003 to 3,192 GWh in 2004 while sales to contractedcustomers declined 3.1%.

 

Revenues in Argentina increased by 30.0%, fromCh$ 118.2 billion in 2003 to Ch$ 153.6 billion in 2004.  The increase in revenues was primarily due toa 25.3% increase in the volume of electricity sales.  The main drivers of this increase weregreater demand for electricity in the Argentine market andEndesa Costanera’s ability to generate electricity with liquid fuels as analternative to natural gas when the natural gas supply in Argentina is incrisis.  Volume sales at our Chocón plantin 2004 were 22.4% lower than in 2003 due to less favorable water levels.  The Company’s average sales price inArgentina expressed in Chilean pesos according to the convention of TechnicalBulletin 64 increased 3.7%, from Ch$ 12.8 per kWh in 2003 to Ch$ 13.2in 2004.  However, when expressed inArgentine local currency, the nominal average sales price increased 13.0% in2004 due to an increase in the wholesale market spot price.

 

Revenues in Colombia increased by 17.6%, fromCh$ 221.5 billion in 2003 to Ch$ 260.4 billion in 2004.  Physical electricity sales increased 4.6% dueto higher sales at Emgesa which were driven by market demand andhydrology.  Both spot market andcontracted energy sales increased in both 2004 and 2003, representing 36% and

 

91

----

 

64%, respectively, of our total sales in Colombia.  The average sales price increased 12.4%, fromCh$ 15.3 per kWh in 2003 to Ch$ 17.2 per kWh in 2004, expressed inChilean pesos according to the convention of Technical Bulletin 64.  When expressed in local currency, the averagesales price increase was 7.8% in 2004.

 

Revenues from our Brazilian subsidiary, CachoeiraDourada, increased by 33.1% from Ch$ 32.7 billion in 2003 to Ch$ 43.5billion in 2004.  This revenue increaseis due to a 3.5% increase in physical sales, which reached 3,902 GWh in 2004,and higher electricity prices.  Volume increaseddue to greater demand and favorable hydroelectric conditions in thesoutheast.  Sales prices were higher inboth the spot market and the contracted market. Revenues from Cachoeira Dourada’s main customer, Celg, increasedaccording to the terms of their contractual agreement and also as a result of14 million reales recognized in June 2004 following the conclusion of alegal dispute regarding revenues not billed during the second semester of2003.  See “Item 8. FinancialInformation—A. Consolidated Statements and Other Financial Information—LegalProceedings.”  The Company’s overallaverage sales price increased 28.6% from Ch$ 8.7 per kWh in 2003 toCh$ 11.2 per kWh in 2004, expressed in Chilean pesos according to theconvention of Technical Bulletin 64 (after adjusting for income in arrears from2003).  In Brazilian local currency, theCompany’s average sales price increased by 26.2% during 2004.

 

Revenues from sales of our Peruvian electricitygeneration company, Edegel, increased by 7.7%, from Ch$ 118.7 billion in2003 to Ch$ 127.8 billion in 2004. The volume of electricity sales declined due to lower hydro generationas a consequence of poor hydrology in the region, mainly during the firstsemester of 2004.  The average salesprice increased from Ch$ 26.5 per kWh in 2003 to Ch$ 29.3 per kWh in2004, equivalent to a 10.4% increase, expressed in Chilean pesos according tothe convention of Technical Bulletin 64. The average sales price increase in local currency was 18.2% in 2004.

 

***Cost of operations***

 

The table below sets forth the breakdown by country ofcosts of operations for 2003 and 2004 and the percentage change from year toyear:

 
| ** **                     | ** ** | **Year ended December 31,**                                                     | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2003**                                                                             | ** ** | **2004** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | **(in millions of constant Ch$ as  of December  31, 2004, except percentages)** | ** ** |
| Cost of Operations (1)         |       |                                                                                 |       |   |   |   |   |
| Cost of operations (Chile)     |       | 302,922                                                                              |       | 309,688 |   | 2.2 |   |
| Cost of operations (Argentina) |       | 81,808                                                                               |       | 115,360 |   | 41.0 |   |
| Cost of operations (Colombia)  |       | 127,316                                                                              |       | 133,834 |   | 5.1 |   |
| Cost of operations (Brazil)    |       | 26,776                                                                               |       | 26,885 |   | 0.4 |   |
| Cost of operations (Peru)      |       | 45,701                                                                               |       | 66,075 |   | 44.6 |   |
| Total                          |       | 584,519                                                                              |       | 651,842 |   | 11.5 |   |

 

----

(1)          excludesSG&A expenses

 

The 2.2% increase in operating costs in Chile during2004 when compared to 2003 is due to greater thermal generation fuel expensesand electricity purchases.  Weaker hydroconditions during the first semester of 2004 led to a 26% increase in thermalgeneration, resulting in an average variable cost of generation, excludingelectricity purchases, of Ch$ 9.2 per kWh in 2004, compared toCh$ 8.8 per kWh in 2003. Electricity purchases, both energy and capacity, increased fromCh$ 51.5 billion in 2003 to Ch$ 55.0 billion in 2004.  Physical GWh purchases declined, but thehigher average price, which went from Ch$ 21.4 in 2003 to Ch$ 28.7 in2004, implied increasing the total cost. These greater costs were partially offset by a 7% reduction in assetdepreciation, from Ch$ 73.2 in 2003 to Ch$ 68.0 in 2004.

 

Costs of operations in Argentina increased by 41.0% toCh$ 115.4 billion in 2004.  Totalphysical generation increased by 41.2%. Thermal generation increased 99.8% and hydro generation declined15.0%.  As a result of the natural gasshortage in Argentina, Endesa Costanera increased its use of liquid fuelin thermal generation, which is relatively more expensive than naturalgas.  As a result of the higher volumeand price, cost of fuel increased by 237.6% or Ch$ 40.2 billion during2004.  The average variable cost ofgeneration, excluding the cost of electricity

 

92

----

 

purchases, increased from Ch$ 3.2 per kWh in 2003 to Ch$ 5.9per kWh in 2004 due to the higher cost of fuel. Physical electricity purchases declined in 2004, reducing purchaseexpenses from Ch$ 10.0 billion in 2003 to Ch$ 6.1 billion in2004.  The cost of asset depreciationincreased 7.3%.  The appreciation of theChilean peso in terms of the U.S. dollar reduced total operating expenses in2004 when compared to 2003 by Ch$ 6.8 billion.

 

Costs of operations in Colombia increased by 5.1% toCh$ 133.8 billion in 2004 from Ch$ 127.3 billion in 2003.  Physical generation was 10.1% greater in 2004than 2003 as a consequence of favorable hydrology, which, although leading tohigher tolls and energy transportation costs, implied reducing electricitypurchases.  The variable cost per kWhgenerated in 2004, excluding the cost of energy purchases, was Ch$ 4.4compared to Ch$ 3.7 in 2003.  Thevolume of electricity purchases declined 11.1% and the cost of purchasesexpressed in Chilean pesos declined 1.4% affected by the 8% appreciation of theyearly average Colombian peso U.S. dollar exchange rate.  Asset depreciation declined 8.4%.  The appreciation of the Chilean peso in termsof the U.S. dollar reduced total operating expenses by Ch$ 10.7 billion in2004 when compared to 2003.

 

Costs of operations in Brazil remained stable,reaching Ch$ 26.9 billion in 2004 as compared to Ch$ 26.8 billion in2003.  Physical generation was 7.9%greater in 2004 than 2003 as a consequence of favorable hydrology, whichincreased transportation costs, but implied reducing the volume electricitypurchases.  The volume of electricitypurchases declined 14.1%, but the cost of purchases increased due to theincrease in the price of purchases.  Theaverage variable cost per kWh generated in 2004, excluding the cost of energypurchases, was Ch$ 1.9 in 2004 and Ch$ 1.9 in 2003.  The higher costs incurred were offset bylower asset depreciation.  Theappreciation of the Chilean peso in terms of the U.S. dollar reduced totaloperating expenses in 2004 when compared to 2003 by Ch$ 2.2 billion.

 

Costs of operations in Peru increased by 44.6% toCh$ 66.1 billion in 2004 from Ch$ 45.7 billion in 2003, mainly due toan increase of Ch$ 14.5 billion in fuel expenses and a Ch$ 4.3billion increase in energy purchases. The increase in these expenses was due to the lack of rainfall, mainlyduring the first semester of 2004, which caused total thermal generation in2004 to be 15 times greater than 2003 and also required an increase in physicalenergy purchases of 26.6%.  The variablecost of generation per kWh, excluding electricity purchases, was Ch$ 7.9in 2004 compared to Ch$ 3.5 in 2003. The cost of asset depreciation declined 4.6%.  The appreciation of the Chilean peso in termsof the U.S. dollar reduced total operating expenses by Ch$ 3.8 billion in2004 when compared to 2003.

 

***Administrative andselling expenses***

 

Administrative and selling expenses increased by 7.3%to Ch$ 35.7 billion in 2004 from Ch$ 33.3 billion in 2003, althoughthe percentage of total operating expenses declined from 5.7% in 2003 to 5.5%in 2004.  The most relevant factors inthe increase in the level of expenses are an increase in the cost of personnelin Argentina and Chile, in Argentina related to the 41% increase in electricitygeneration and in Chile related to higher provisions for retirement benefits,and the increase in insurance expenses and personnel costs in Colombiansubsidiaries.

 

The table below sets forth the breakdown of selling andadministrative expenses for 2003 and 2004 and the percentage change from yearto year:

 
| ** **                               | ** ** | **Year ended December 31,**                                                         | ** ** |
|------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2003**                                                                                 | ** ** | **2004** | ** ** | **% Change** | ** ** |
| ** **                               | ** ** | **(in millions of constant Ch$ as  or December 31, 2004  except percentages)** | ** ** |
| Administrative and Selling Expenses      |       |                                                                                     |       |   |   |   |   |
| In Chile                                 |       | 18,427                                                                                   |       | 19,620 |   | 6.5 |   |
| In Argentina                             |       | 2,049                                                                                    |       | 2,662 |   | 29.9 |   |
| In Colombia                              |       | 2,885                                                                                    |       | 3,894 |   | 35.0 |   |
| In Brazil                                |       | 2,039                                                                                    |       | 1,804 |   | (11.5 | ) |
| In Peru                                  |       | 7,864                                                                                    |       | 7,706 |   | (2.0 | ) |
| Total Selling and Administrative Expense |       | 33,263                                                                                   |       | 35,686 |   | 7.3 |   |

 

93

----

 

***Operating Marginand Operating Income***

 

Our operating margin, that is, operating income as apercentage of revenues, declined from 36.8% in 2003 to 35.7% in 2004.  This reduction is explained by a loweroperating margin in Chile, Argentina and Peru.

 
| ** **                        | ** ** | **Year ended December 31,**                                                              | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **2003**                                                                                      | ** ** | **2004** | ** ** |
| ** **                        | ** ** | **(based on figures in Chilean  GAAP in millions of Ch$ as of  December 31, 2004)** | ** ** |
| Operating Margin (Chile)          |       | 33.9                                                                                          | %          | 32.0 | % |
| Operating Margin (Argentina)      |       | 29.0                                                                                          | %          | 23.2 | % |
| Operating Margin (Colombia)       |       | 41.2                                                                                          | %          | 47.1 | % |
| Operating Margin (Brazil)         |       | 11.9                                                                                          | %          | 34.1 | % |
| Operating Margin (Peru)           |       | 54.9                                                                                          | %          | 42.3 | % |
| **Consolidated Operating Margin** | ** ** | **36.8**                                                                                      | **%**      | **35.7** | **%** |

 

Endesa Chile’s consolidated operating income, theresult of subtracting total operating expenses, including selling andadministrative expenses (SG&A), from operation revenues, reachedCh$ 382.3 billion for 2004 compared to Ch$ 359.5 billion for2003.  The following table breaks downoperating income by country for the years ended December 31, 2003 and2004:

 
| ** **                   | ** ** | **Year ended December 31,**                                                          | ** ** |
|------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **2003**                                                                                  | ** ** | **2004** | ** ** | **% Change** | ** ** |
| ** **                   | ** ** | **(in millions of constant Ch$ as  of December 31, 2004,  except percentages)** | ** ** |
| Operating Income (Chile)     |       | 164,870                                                                                   |       | 155,108 |   | (5.9 | ) |
| Operating Income (Argentina) |       | 34,313                                                                                    |       | 35,616 |   | 3.8 |   |
| Operating Income (Colombia)  |       | 91,306                                                                                    |       | 122,721 |   | 34.4 |   |
| Operating Income (Brazil)    |       | 3,884                                                                                     |       | 14,829 |   | 281.8 |   |
| Operating Income (Peru)      |       | 65,091                                                                                    |       | 54,035 |   | (17.0 | ) |
| Total                        |       | 359,464                                                                                   |       | 382,310 |   | 6.4 |   |

 

In Chile, operating margin and income declined due torelatively lower hydro conditions, mainly in the first semester of 2004, inaddition to the natural gas crisis in Argentina, which increased fuel costs andenergy purchase costs.  Althoughelectricity spot sales prices reacted, node prices and free customer contractprices react with a lag.

 

With regard to foreign subsidiaries, the effect of theappreciation of the Chilean peso on revenues negatively affected marginsbecause revenues from foreign subsidiaries were translated into Chilean pesos,according to Technical Bulletin 64, at a lower year-end exchange rate in 2004than in 2003.  Additionally, the positiveeffect of this appreciation on fuel prices was offset by the stronger impact onprices of the gas crisis in Argentina and the level of international fuelprices, which are denominated in U.S. dollars.

 

Operating margins in Argentina declined as aconsequence of the government’s intervention on the sales price, althoughoperating income increases due to the strong impact of volume sales.  The operating margin from Argentina declinedas a consequence of the limited reaction of the electricity market prices tomarket conditions.  Market prices wereunable to adjust to demand conditions and the actual cost of fuel becauseresolutions of the Argentine government controlled the sales price in thewholesale market.  Operating income fromEndesa Costanera increased Ch$ 1.0 billion to Ch$ 29.5 billionand operating income from Chocón increased Ch$ 0.4 billion to Ch$ 6.1billion in 2004.  Operating margin andoperating income in Brazil increased as a consequence of greater demand, theagreement reached with the Company’s main customer, Celg, which includedbilling electricity delivered and not billed in 2003, hydrology conditions, andsimultaneously better prices on the spot market.

 

In Colombia, operating margins and operating incomeincreased, due to greater demand and hydrology, increasing volume sales, andhydro generation and simultaneously better market sales prices.  Operating income

 

94

----

 

from Emgesa increased Ch$ 19.0 billion to Ch$ 104.5 billionand operating income from Betania increased Ch$ 12.4 billion toCh$ 18.2 billion in 2004.

 

Edegel, in Peru, registered lower operating marginsand operating income.  This was caused bythe low level of hydrology, mainly during the first semester of the 2004, whichled to greater thermal generation, at relatively high international prices, andgreater electricity purchases at very high spot prices.  Another contributing factor was the reactionof the government, which required private generators to supply energy todistributors without contractual agreements, at the regulated tariff, which attimes was one fifth of the alternative spot market price, consequently preventingthe company from offsetting greater costs by increasing the average salesprice.

 

***Non-operatingResults***

 

The following table sets forth certain informationregarding our non-operating results for each of the periods indicated:

 
| ** **                                    | ** ** | **Year ended December 31,**                                                          | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2003**                                                                                  | ** ** | **2004** | ** ** | **% Change** | ** ** |
| ** **                                    | ** ** | **(in millions of constant Ch$ as  of December 31, 2004,  except percentages)** | ** ** |
| **Non-operating income:**                     |       |                                                                                      |       |   |   |   |   |
| Interest  earned                              |       | 16,207                                                                                    |       | 15,449 |   | (4.7 | ) |
| Equity  income of non-consolidated affiliates |       | 18,841                                                                                    |       | 19,984 |   | 7.9 |   |
| Other  non-operating income                   |       | 47,332                                                                                    |       | 53,087 |   | 12.2 |   |
| **Non-operating expenses:**                   |       |                                                                                      |       |   |   |   |   |
| Interest  expense                             |       | (216,772                                                                                  | )          | (199,490 | ) | (8.0 | ) |
| Equity  losses of non-consolidated affiliates |       | (396                                                                                      | )          | (90 | ) | (77.4 | ) |
| Goodwill  amortization                        |       | (1,639                                                                                    | )          | (1,516 | ) | 7.5 |   |
| Other  non-operating expenses                 |       | (63,780                                                                                   | )          | (82,140 | ) | 28.8 |   |
| **Monetary correction:**                      |       |                                                                                      |       |   |   |   |   |
| Price level  restatement                      |       | 610                                                                                       |       | 2,291 |   | 275.2 |   |
| Foreign  Exchange translation                 |       | 9,510                                                                                     |       | 21,373 |   | 124.7 |   |
| **Non-operating  results**                    |       | (190,085                                                                                  | )          | (171,052 | ) | (10.0 | ) |

 

Non-operating results amounted to a loss ofCh$ 171.1 billion in 2004 in comparison to a loss of Ch$ 190.1billion in 2003, a Ch$ 19.0 billion reduction in losses.  The most important factors leading to this reductioninclude:

 

•                  lower interestexpenses of Ch$ 17.3 billion mainly due to the appreciation of the Chileanpeso against the U.S. dollar, considering that, as of December 31, 2004,69% of the Company’s financial debt (net of currency hedging instruments) wasdenominated in U.S. dollars;

 

•                  greater incomedue to foreign exchange translation of Ch$ 11.9 billion mainly due to the6.1% appreciation of the Chilean peso during 2004 compared to the 17.4%appreciation in 2003; and

 

•                  othernon-operating expenses increased by Ch$ 18.4 billion mainly explained bythe provisions made as a consequence of the resettlements of capacity powerpayments among the generation companies connected to the main interconnectedelectricity system in Chile, SIC, from years 2000 to 2003 resulting fromResolution 35 adopted by the Ministry of Economy in December 2004.  (See “Item 8. Financial Information—A.Consolidated Statements and Other Financial Information—LegalProceedings—Divergence of Firm Capacity.”)

 

***Net income***

 

The following table sets forth our net income for theperiods indicated:

 

95

----

 
| ** **                                                                         | ** ** | **Year ended December 31,**                                                          | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2003**                                                                                  | ** ** | **2004** | ** ** | **% Change** | ** ** |
| ** **                                                                         | ** ** | **(in millions of constant Ch$ as  of December 31, 2004,  except percentages)** | ** ** |
| Operating income                                                                   |       | 359,465                                                                                   |       | 382,310 |   | 6.4 |   |
| Non-operating income                                                               |       | (190,085                                                                                  | )          | (171,052 | ) | (10.0 | ) |
| **Net  income before taxes, minority interest and negative goodwill amortization** | ** ** | **169,379**                                                                               | ** ** | **211,257** | ** ** | **24.7** | ** ** |
| Income tax                                                                         |       | (53,187                                                                                   | )          | (54,678 | ) | (2.8 | ) |
| Deferred  taxes                                                                    |       | 24,115                                                                                    |       | (42,112 | ) | n.a. |   |
| **Total  income taxes**                                                            | ** ** | **(29,072**                                                                               | **)**      | **(96,790** | **)** | **232.9** | ** ** |
| Minority  interest                                                                 |       | (73,894                                                                                   | )          | (44,343 | ) | (40.0 | ) |
| Amortization  of negative goodwill                                                 |       | 16,555                                                                                    |       | 16,681 |   | 0.8 |   |
| Extraordinary  items                                                               |       | 0                                                                                         |       | 0 |   | n.a. |   |
| **Net  income**                                                                    | ** ** | **82,967**                                                                                | ** ** | **86,805** | ** ** | **4.6** | ** ** |

 

*Income Taxes*.  The higher figure for income tax is explainedby the higher level of taxable income from operations in Colombia.

 

The higher charge for deferred taxes, which arenon-cash items, increased Ch$ 66.2 billion compared to 2003, mainlyexplained by the Ch$ 49.7 billion increase at our subsidiaries in Argentina.  During 2003, Endesa Costanera andEl Chocón registered important tax losses as a result of the significantdevaluation of the Argentine peso. However, as a result of the recovery of the Argentine exchange rate andimproved results of the companies, the balance of these losses was reduced in2004.  Also, to a lesser extent, certainof our other companies registered an increase in deferred taxes: Endesa Chileitself with Ch$ 8.7 billion and Edegel with Ch$ 5.6 billion.

 

*Minority Interest*.  Minority interest expenses declinedCh$ 29.6 billion in 2003, due to the lower net income from San Isidro inChile, Edegel in Peru, and Chocón and Endesa Costanera in Argentina, thelatter due solely to an increase in tax expenses related to the appreciation ofthe Argentine peso, (as Endesa Costanera’s income before taxes was 45%greater than in 2003).

 

**B.**            Liquidity and capital resources.

** **

The following discussion of our cash sources and usesreflects the key drivers of cash flow of Endesa Chile, as they are regularlyinformed to the holders of Endesa Chile debt and included as a financialcovenants ratio.  (For information oncash flows from the accounting rather than financial perspective, see theAudited Consolidated Statement of Cash Flows in Item 18.)

 

We believe that cash flow generated from operations,cash balances, assets sales, borrowings from commercial banks and access toboth domestic and foreign capital markets will be sufficient to meet our needsfor working capital, debt service, dividends and routine capital expenditures.

 

Endesa Chile receives cash inflows from its ownoperational assets, from its wholly owned subsidiaries and non wholly ownedsubsidiaries as well as from related companies in Chile and abroad.

 

Cash flows received from subsidiaries in which EndesaChile has 100% ownership, that is, San Isidro, Endesa Internacional and ConoSur, are included in the analysis as inflows and outflows from operatingactivities, given that these companies revenues and expenses are wholly ownedby Endesa Chile. Endesa Chile has always had access to these wholly-ownedsubsidiary cash flows.  Inflows andoutflows of non-wholly owned subsidiaries and related companies in Chile andabroad are included in the analysis primarily as dividends and capitalreductions received from investment in shares in those companies, and also asinterest income and intercompany debt amortization resulting from intercompanyloans to those companies. 

 
| **(figures in U.S.$ million)** | ** ** | **2004** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| **INITIAL CASH (A)**                |       | 10.5     |       | 125.8    |       |

 

96

----

 
| **SOURCES (B) + (C)**                            |   | 1,100.1 |   | 1,106.3 |   |
|-------------------------------------------------------|--------|---------|--------|---------|--------|
|                                                  |   |    |   |    |   |
| **Cash Inflows from Chile (B)**                       |   | 871.6   |   | 981.5   |   |
| Cash Inflows  from Operations                         |   | 645.0   |   | 863.8   |   |
| Interest  Income from Chilean Subs                    |   | 4.7     |   | 5.8     |   |
| Dividends  from Chilean Subs                          |   | 109.3   |   | 66.8    |   |
| Amortization  of Intercompany loans from Chilean Subs |   | 12.7    |   | 0.0     |   |
| Other Income  from non-Operating Activities           |   | 99.8    |   | 45.2    |   |
|                                                  |   |    |   |    |   |
| **Cash Inflows from foreign subsidiaries (C)**        |   | 228.5   |   | 124.8   |   |
| Interest  Income from foreign Subs                    |   | 34.5    |   | 11.5    |   |
| Dividends  from Foreign Subs                          |   | 45.4    |   | 50.3    |   |
| Capital  Reductions                                   |   | 8.5     |   | 18.3    |   |
| Amortization  of Intercompany loans from Foreign Subs |   | 138.0   |   | 42.6    |   |
| Management  Fee and Others                            |   | 2.1     |   | 2.0     |   |
|                                                  |   |    |   |    |   |
| **USES (D) + (E)**                               |   | 984.8   |   | 1,208.8 |   |
|                                                  |   |    |   |    |   |
| **Cash Outflows from Operations (D)**                 |   | 535.3   |   | 654.5   |   |
| Cash  Outflows from Operations                        |   | 512.1   |   | 594.2   |   |
| Taxes                                                 |   | 23.3    |   | 60.3    |   |
|                                                  |   |    |   |    |   |
| **Cash Outflows from Non-Operating Activities  (E)**  |   | 449.4   |   | 554.3   |   |
| Intercompany  Loans                                   |   | 0.0     |   | 41.0    |   |
| Interest  Expenses and Derivative Contracts           |   | 191.7   |   | 215.8   |   |
| Dividend  Payment                                     |   | 36.5    |   | 60.8    |   |
| Net  Financial Debt Amortization                      |   | 208.5   |   | 221.3   |   |
| Others                                                |   | 12.7    |   | 15.4    |   |
|                                                  |   |    |   |    |   |
| **FINAL  CASH (A)+(B)+(C)**–**(D)**–**(E)** |   | 125.8   |   | 23.4    |   |

 

For thetwelve-month period ended December 31, 2005, Endesa Chile’s principalsources of funds were:

 

•                  U.S.$ 863.8million cash inflows from operating revenues, before taxes and interestexpenses, of Endesa Chile and its wholly owned Chilean subsidiaries;

 

•                  U.S.$ 72.6million from interest income, dividends and amortization of intercompany loansfrom its non-wholly owned Chilean subsidiaries;

 

•                  U.S.$ 45.2million from non-operating activities, includes U.S.$ 5.5 million from thesales of assets, U.S.$ 24.2 million from interest income and intercompanydebt amortization from related companies and third parties, dividends ofU.S.$ 3 million from related companies; the inflow for U.S.$ 12.5million received from the re-settlement of balances of firm capacity in theSIC, made by the CDEC-S1C, for the period between April 2000 to March 2004;

 

•                  U.S.$ 11.5million on interest income from intercompany debt with its Argentinesubsidiaries;

 

•                  U.S.$ 50.3million from dividends, which included U.S.$ 36.1 million from Braziliansubsidiaries and related companies and U.S.$ 14.1 million from Peruviansubsidiaries;

 

•                  U.S.$ 18.3million in capital reductions, which are wholly contributed by Peruviansubsidiaries;

 

•                  U.S.$ 42.6million from intercompany debt amortization by Colombian subsidiaries.

 

97

----

 

Funds received from foreign subsidiaries, principallyin Perú and Colombia, are in line with the financial objectives of EndesaChile, that is to refinance subsidiaries debt in local currency.

 

For the same twelve-month period ended December 31,2005, Endesa Chile’s principal cash outflows totaled an approximate amount ofU.S.$ 1,208.8 million, through the following:

 

•                  U.S.$ 594.2million in operating expenses of Endesa Chile and its wholly owned Chileansubsidiaries, including investments and capital expenditure;

 

•                  U.S.$ 60.3million in net sale taxes paid by Endesa Chile and its wholly owned Chileansubsidiaries;

 

•                  U.S.$ 41.0million in net intercompany loans, borrowed by its Chilean subsidiaries inwhich Endesa Chile does not have a 100% ownership;

 

•                  U.S.$ 215.8million in interest expenses (net of derivative contracts). In 2005, derivativeinstruments resulted in negative U.S.$ 8.9 million;

 

•                  U.S.$ 60.8million in dividend payments by Endesa Chile and dividends paid by Endesa Chile’swholly owned Chilean subsidiaries to third parties.  During 2005, Endesa Chile raised its dividendpolicy from 30% to 50%.

 

•                  U.S.$ 221.3million of net financial debt amortization (discounting new debt used forrefinancing purposes).   Endesa Chilecontinues to reduce debt using free cash flow. In addition, to its programmed debt payment schedule in late April 2005,Cía, Eléctrica San Isidro S.A. (a wholly-owned Endesa Chile subsidiary),fully prepaid the outstanding portion of its Mitsubishi Corp. supplier credit,for a total amount of U.S.$ 46.5 million. On May 2, 2005, Endesa Chile prepaid the Local Bond Series C2,D1 and D2 using cash surpluses, for a total amount of approximatelyU.S.$ 31 million and also during the last quarter of the year made twoU.S.$ 60 million prepayments of its Revolving Credit Facility.  The item “Others” in “Cash Outflows fromNon-Operating Activities” includes the payment of U.S.$ 15 million toacquire an additional 25% of Compañía Eléctrica San Isidro S.A., with whichthe Endesa Chile direct and indirect shareholding in the company reaches 100%of the share capital;

 

For the twelve-month period ended December 31,2004, our principal sources of funds were:

 

•                  U.S.$ 645.0million cash inflows from operating revenues, before taxes and interestexpenses of Endesa Chile and its Chilean wholly owned subsidiaries;

 

•                  U.S.$ 126.7million from interest income, dividends and amortization of intercompany loansfrom its non-wholly owned Chilean subsidiaries;

 

•                  U.S.$ 99.8million from non-operating activities, which includes U.S.$ 60.0 millionfrom the sale of Endesa Chile’s former subsidiary Infraestructura 2000, andU.S.$ 39.8 million from interest income and intercompany debt amortizationfrom related companies and interest income from time deposit;

 

•                  U.S.$ 34.5million on interest income from intercompany debt with its foreignsubsidiaries, which includes U.S.$ 11.8 million received from itsArgentine subsidiaries and U.S.$ 22.7 million from Colombian subsidiaries;

 

•                  U.S.$ 45.4million from dividends, which included U.S.$ 27.8 million from Braziliansubsidiaries and related companies and U.S.$ 17.6 million from itsPeruvian subsidiaries;

 

•                  U.S.$ 8.5million in capital reductions, which are wholly contributed by Peruvian subsidiaries;

 

•                  U.S.$ 118.0million from intercompany debt amortization of Colombian subsidiaries andU.S.$ 20.0 million from Argentine subsidiaries. In November 2004,Betania issued a bond in the Colombian market to prepay part of theintercompany debt owed to Cono Sur, Endesa Chile’s wholly owned subsidiary.

 

The aggregate inflows of cash from these sourcesamounted to approximately U.S.$ 1,100.1 million.

 

98

----

 

For the same twelve-month period ended December 31,2004, Endesa Chile’s principal cash outflows totaled an approximate amount ofU.S.$ 984.8 million, through the following:

 

•                  U.S.$ 512.1million from operating expenses of Endesa Chile and its wholly owned Chileansubsidiaries, including investments and capital;

 

•                  U.S.$ 23.3million in net sale taxes paid by Endesa Chile and its Chilean wholly ownedsubsidiaries;

 

•                  U.S.$ 191.7million in net interest expenses (including derivative contracts). During 2004,the result in derivative’s instruments was positive in U.S.$ 24.7 million;

 

•                  U.S.$ 36.5million in dividend payments by Endesa Chile and dividends paid by Endesa Chile’sChilean wholly owned subsidiaries to third parties;

 

•                  U.S.$ 208.5million of net financial debt amortization (discounting new debt used forrefinancing purposes);

 

Endesa Chile’s cash generation including its whollyowned subsidiaries, as of December 31, 2004 was approximatelyU.S.$ 125.8 million.

 

For a description of liquidity risks resulting fromthe inability of our subsidiaries to transfer funds to us, please see “Item 3.Key Information—D. Risk Factors—*We depend in part onpayments from our subsidiaries and related companies to meet our paymentobligations*.”

 

We coordinate the overall financing strategy of oursubsidiaries. Our operating subsidiaries independently develop capitalexpenditure plans and our strategy is generally to have the operatingsubsidiaries independently finance capital expansion programs throughinternally generated funds or direct financings. We coordinate all generationacquisition financing at Endesa Chile. For information regarding ourcommitments for capital expenditures, see “Item 4.—Information on theCompany—A. History and Development of the Company—Investments, CapitalExpenditures and Divestitures.”

 

We have accessed the international equity capitalmarkets, registering one ADS issuance with the SEC in August 3, 1994. Wehave also frequently issued bonds in the international capital markets, orYankee Bonds. Endesa Chile and Endesa Chile Internacional issued Yankee Bondsbetween 1996 and 2003, of which U.S.$ 2.20 billion are currentlyoutstanding. In June 2000 Endesa Chile established a Euro medium-term noteprogram, or EMTN Program, for an aggregate amount of € 1 billion. In July 2000Endesa Chile issued € 400 million in 3-year floating rate notes, whichwere paid in 2003.

 

The following table lists the Yankee Bonds of EndesaChile and consolidated subsidiaries outstanding as of the date of this annualreport.  The weighted average annualinterest rate for Yankee Bonds issued by Endesa Chile and its consolidatedsubsidiaries, of which an aggregate principal amount U.S.$ 2.20 billion iscurrently outstanding, is 8.04.%

 
| **Issuer**                 | ** ** | **Maturity**          | ** ** | **Coupon**            | ** ** | **Aggregate  Principal Amount  Issued** | ** ** |
|----------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------------------------|------------|
| ** **                 | ** ** | ** **            | ** ** | **(as a percentage)** | ** ** | **(in U.S. millions)**                  | ** ** |
| Endesa Chile Internacional |       | April 1,2006     |       | 7.200                 |       | 150                                     |       |
| Endesa Chile               |       | July 15, 2008    |       | 7.750                 |       | 400                                     |       |
| Endesa Chile               |       | April 1, 2009    |       | 8.500                 |       | 400                                     |       |
| Endesa Chile               |       | August 1, 2013   |       | 8.350                 |       | 400                                     |       |
| Endesa Chile               |       | August 1, 2015   |       | 8.625                 |       | 200                                     |       |
| Endesa Chile               |       | February 1, 2027 |       | 7.875                 |       | 230                                     |       |
| Endesa Chile (1)           |       | February 1, 2037 |       | 7.325                 |       | 220                                     |       |
| Endesa Chile               |       | February 1, 2097 |       | 8.125                 |       | 200                                     |       |

 

99

----

 

----

(1)          Holdersof these Yankee Bonds can exercise a put option against Endesa Chile on February 1,2009.

 

The Endesa Chile Yankee Bonds contain covenants thatplace restrictions on the extent to which Endesa Chile and certain of itssubsidiaries may (i) create or incur liens on properties and assets and (ii) enterinto sale and leaseback transactions.

 

Endesa Chile and our subsidiaries in the fivecountries in which we operate also have access to the local capital markets,where we have issued debt instruments including commercial paper and medium andlong-term bonds that are primarily sold to pension funds, life insurancecompanies, and other institutional investors.  As of the date of this report, we are incompliance with our material covenants contained in our debt instruments.  For detailed information about local bondsissued by Endesa Chile, see note 16 to our Audited Consolidated FinancialStatements.

 

Endesa Chile is also a frequent borrower in thecommercial bank markets, both in the form of bilateral loans as well as insyndicated loans. On May 15, 2003, Endesa Chile merged its outstandingsyndicated and bilateral credit agreements, which would have otherwise maturedin 2003 and 2004, into a credit agreement for approximately U.S.$ 743million, refinancing most of the existing bank indebtedness of the Company.This facility eliminated a mandatory prepayment in the event that the borrowerfails to achieve “investment grade” ratings from Standard & Poor’s.  The total outstanding amount under thiscredit facility has been prepaid in full.

 

On July 18, 2003, Endesa Chile, acting directlythrough its Cayman Island branch, issued two Yankee Bonds for amounts ofU.S.$ 400 million and U.S.$ 200 million and maturities on August 1,2013 and August 1, 2015, respectively. The principal use of proceeds wasto pay the € 400 million three-year floating rate notes issued in 2000 byEndesa Chile Internacional (Endesa Chile’s wholly-owned finance subsidiary),which matured on July 24, 2003.

 

On October 24, 2003, Endesa Chile successfullyplaced a local bond for UF 8,000,000 (approximately U.S.$ 214million) in two equal tranches with maturities of 7 and 25 years at rates of5.65% and 6.74% respectively. The use of these proceeds was to prepay part ofthe U.S.$ 743 million credit facility dated May 15, 2003.

 

On February 4, 2004, Endesa Chile entered into anagreement with a syndicate of banks to provide a new U.S.$ 250 millionsenior unsecured term loan facility through Endesa Chile’s Cayman Islandsbranch. Endesa Chile borrowed the full amount under this facility to repay theoutstanding balance of the U.S.$ 743 million credit facility dated May 15,2003.

 

On November 5, 2004, Endesa Chile, through EndesaChile’s Cayman Islands branch, entered into a new credit agreement pursuant towhich a syndicate of banks agreed to provide a new U.S.$250 million seniorunsecured revolving loan facility (the “Endesa Chile Facility”), the proceedsof which were used to repay all amounts outstanding under the February 4,2004 credit facility.

 

The Endesa Chile Facility ranks *pari passu*with all other unsubordinated debt of Endesa Chile. No principal repayments arerequired under the Endesa Chile facility until it matures on November 10,2010. Prior to maturity, Endesa Chile is required to pay interest in respect ofthe unpaid principal amount of all loans under the Endesa - Chile Facility,subject to mandatory prepayment of all amounts owed to any lender, at theoption of such lender, in the event of a change of control or Endesa Chileceasing to be a public company.

 

The Endesa Chile Facility requires Endesa Chile tomaintain specified financial covenants related to maximum ratios ofindebtedness to adjusted cash flow (ranging from 9.40:1 in 2004 to 7.50:1 in2010), indebtedness to EBITDA (ranging from 6.30:1 in 2004 to 4.20:1 in 2010),debt to equity (ranging from 112.5% in 2004 to 100.0% in 2010), and a minimumratio of adjusted cash flow to interest expense (ranging from 1.50:1 in 2004 to2.0:1 in 2010).

 

The Endesa Chile Facility contains covenants thatplace restrictions on the extent to which Endesa Chile and certain of itssubsidiaries can (i) sell, assign, transfer or contribute essentialoperating assets, (ii) repurchase or redeem its capital stock or makeother distributions in respect of its capital stock, (iii) consummatemergers, consolidations, liquidations or dissolutions, (iv) conduct salesof assets, (v) create or incur liens on properties and assets, (vi) enterinto transactions with affiliates (other than in the ordinary course ofbusiness and at arm’s length),

 

100

----

 

(vii) enter into sale and leaseback transactions and (viii) permitany material change in the nature of the principal business of Endesa Chile orof Endesa Chile and its subsidiaries taken as a whole. These restrictions willcease to apply upon repayment in full of the Endesa Chile Facility, whichmatures on November 10, 2010. We do not consider these covenants andrestrictions to be material.

 

The margin over LIBOR at which interest accrues underthe Endesa Chile Facility is determined by reference to the S&P rating ofEndesa Chile’s senior unsecured long-term foreign currency denominated debt;such margin ranges from 30 basis points for an A- or higher rating to87.5 basis points for a rating lower than BB+. At the time of this filing, thecurrent interest rate applicable to the Endesa Chile Facility is LIBOR plus37.5 basis points. For detailed information about weighted average interestrates applicable to our bank loans, see Note 15 to our Audited ConsolidatedFinancial Statements.

 

Due to voluntary prepayments made during November andDecember 2005, in an aggregate amount of U.S.$ 120 million, theoutstanding amount as of December 31, 2005, of this Endesa Chile Facilitywas U.S.$ 130 million.

 

On January 26, 2006, Endesa Chile, through EndesaChile’s Cayman Islands branch, entered into a new credit agreement pursuant towhich a syndicate of banks agreed to provide a new U.S.$ 200 million seniorunsecured revolving loan facility (the “Endesa Chile New Facility”). Thiscommitted revolving facility shall be used for general corporate purposes,including repayment of the 7.2% Yankee Bond Notes maturing in April 1,2006.

 

The Endesa Chile New Facility ranks *pari passu* with all other unsubordinateddebt of Endesa Chile. No principal repayments are required under theEndesa Chile New facility until it matures on July 28, 2011. Prior tomaturity, Endesa Chile is required to pay interest in respect of theunpaid principal amount of all loans under the Endesa Chile New Facility,subject to mandatory prepayment of all amounts owed to any lender, at theoption of such lender, if Endesa Chile ceases to be a public company, inthe event of a change of control, if Endesa Chile repurchases or redeemsits capital stock (other than the minimum required by law) or any GovernmentAgency of Chile shall impose currency restrictions.

 

The Endesa Chile New Facility requiresEndesa Chile to maintain two specified financial covenants related toConsolidated indebtedness to EBITDA (ranging from 6.40:1 in 2005 to 5.90:1 in2010) and debt to equity (ranging from 112.5% in 2005 to 102.0% in 2011).

 

The Endesa Chile New Facility contains covenantsthat place restrictions on the extent to which Endesa Chile and certain ofits subsidiaries (i) consummate mergers, consolidations, liquidations ordissolutions, (ii) create or incur liens on properties and assets, (iii) enterinto transactions with affiliates (other than in the ordinary course ofbusiness and at arm’s length) (iv) permit any material change in thenature of the principal business of Endesa Chile or of Endesa Chile andits subsidiaries taken as a whole. These restrictions will cease to apply uponrepayment in full of the Endesa Chile New Facility, which matures on July 28,2011. We do not consider these covenants and restrictions to be material.

 

The margin over LIBOR at which interest accrues underthe Endesa Chile New Facility is determined by reference to the S&Prating of Endesa Chile’s senior unsecured long-term foreign currencydenominated debt; such margin ranges from 20 basis points for an A- or higherrating to 75 basis points for a rating lower than BBB-. At the time of thisfiling, the current interest rate applicable to the Endesa Chile NewFacility is LIBOR plus 30 basis points. For detailed information about weightedaverage interest rates applicable to our bank loans, see Note 15 to our AuditedConsolidated Statements.

 

On December 11, 2002, Standard & Poor’slowered its rating for Endesa Chile from “BBB+” to “BBB” as a result of thecurrency devaluations affecting our Argentine and Brazilian subsidiaries andthe reduction in the Chilean node prices. On February 21, 2003, EndesaChile wasdowngraded again from “BBB” to “BBB-” with a negative outlook based primarilyon Standard & Poor’s heightened concerns about Endesa Chile’sability to refinance in the midst of difficult market conditions and thedeterioration of our investments in Argentina and Brazil. On May 16, 2003,and as a direct consequence of our new bank refinancing, Standard &Poor’s lifted its negative outlook and maintained Endesa Chile’s corporateforeign currency ratings debt rating at “BBB-” with a stable outlook. Thisrating was maintained in the January 2005 review. Nevertheless on October 26,2005, Standard and Poor’s changed the outlook from “stable” to “positive.”

 

101

----

 

As is customary for certain credit and capital marketdebt facilities, a significant portion of Endesa Chile’s financialindebtedness is subject to cross default provisions. The Endesa ChileFacility, and the Yankee Bonds represent the Company’s most materialindebtedness, and contain the most material cross default provisions. Otheroutstanding indebtedness is for less significant amounts, and their crossdefault provisions, if any, have higher thresholds.

 

Payment defaults in relation to any individualindebtedness of Endesa Chile, or of its relevant subsidiaries, subject toexpiration of applicable grace periods (if any) and a materiality threshold ofU.S.$ 30 million outstanding (U.S.$ 50 million in the case of theEndesa Chile New Facility) on an individual basis could give rise to across default under these facilities. Endesa Chile’s relevant subsidiariesthat have indebtedness in excess of U.S.$ 30 million as of December 31,2005 are Endesa Chile Internacional and Betania. If Endesa Chile orany of its subsidiaries defaults in the payment on any individual indebtednesshaving a principal amount in excess of U.S.$ 30 million, Endesa Chile’sbondholders would have cross acceleration rights. Endesa Chile’ssubsidiaries that have indebtedness in excess of U.S.$ 30 million as of December 31,2005 are Betania, Emgesa, Endesa Chile Internacional andEndesa Costanera. Any event of default arising out of Endesa Chile’sYankee Bonds could trigger a cross default under most of the existing bankcredit agreements.

 

In addition to the payment cross default provisionsdescribed in the previous paragraphs, certain indebtedness of Endesa Chile issubject to (A) cross acceleration provisions, again subject to amateriality threshold of U.S.$ 30 million (U.S.$ 50 million in thecase of the Endesa Chile New Facility) on an individual basis, and (B) certainother customary events of default.  Someof the more material examples of such customary event of default triggersinclude bankruptcy and insolvency proceedings, material adverse judgments, andcertain governmental actions such as nationalization, seizure, or expropriationof assets.  The general crossacceleration provisions give rise to an event of default only when othermaterial indebtedness has been accelerated at the direction of the requiredlenders thereunder or otherwise pursuant to its terms, after expiration ofgrace periods where applicable.

 

At the time of this filing, our Argentine subsidiaryEndesa Costanera has not yet paid the December 2005 installment ofits credit facility with Mitsubishi Corporation.  However, through an acceptance letter,Mitsubishi Corporation has confirmed its willingness to discuss withEndesa Costanera a new debt payment schedule for U.S.$ 4.8million, composed for capital and accrued interest owed.

 

Finally, most of our companies have access to existingcredit lines sufficient to meet all of our present working capital needs.

 

Payment of dividends and distributions by Endesa Chile’ssubsidiaries and related companies represent a significant source of funds forEndesa Chile.  The payment of dividendsand distributions by such subsidiaries and related companies are subject tolegal and contractual restrictions, such as legal reserve requirements, capitaland retained earning criteria and other restrictions, and is contingent upontheir earnings and cash flows.  EndesaChile has been advised by legal counsel in the various geographical locationswhere its subsidiaries and related companies operate, that there are currentlyno other legal restrictions on the payment to Endesa Chile of dividends ordistributions, from the jurisdictions where such subsidiaries or relatedcompanies are incorporated, other than customary restrictions limitingdividends to the amount of net income and retained earnings.  Certain credit facilities and investmentagreements of Endesa Chile’s subsidiaries restrict the payment of dividends ordistributions under certain circumstances. There can be no assurance that legal restrictions will not be imposed orthat additional contractual restrictions will not arise in the future.  For a description of liquidity risksresulting from our holding company status, please see “Risk Factors—RisksRelating to Our Operations—*We depend in part onpayments from our subsidiaries and related companies to meet our paymentobligations*” in this annual report.

 

We believe that cash flow generated by operations,cash balances, available lines of credit (including lines of credit fromsuppliers) and planned borrowings will be sufficient to meet our workingcapital, debt service and capital expenditure requirements for the foreseeablefuture.  Endesa Chile intends to prepayand roll over up to approximately U.S.$ 350 million of the debt thatexpires in the twelve months following the date of this annual report.

 

Transactions that most significantly affected EndesaChile’s foreign subsidiaries, liquidity in 2005 and January 2006were:  the Endesa Costanera creditagreement with CSFB signed on September 2005 for U.S.$ 30 million,for

 

102

----

 

4.5 years (3 years grace period), and at an interest rate of Libor plus5.75%; additionally Edegel signed in December 2005 two credit facilities;the first with BBVA Banco Continental, for Peruvian soles 41.5 million, a 2year term and a fixed interest rate of 5.88%; and the second with Banco deCrédito del Peru for Peruvian soles 59 million, a 1.5 year term and a fixedinterest rate of 5.25%.  This funding(for a total amount of approx. U.S.$ 30 million) was used to cancelshort-term bank loans.  On November 11,2005, Edegel issued a Local Bond of U.S.$ 20 million with a 7 year termand on October 20, 2005, Edegel issued a Local Bond of Peruvian soles 35million with to refinance short term bank loans with maturity on October 2005(U.S.$ 10.5 million).  Betania on January 10,2006 paid to Conosur (an Endesa Chile wholly-owned financial subsidiary)U.S.$ 30.7 million for interests accumulated since February 2004.

 

The transactions that most significantly affected ourforeign subsidiaries’ liquidity in 2004 was the bond issued in on November 10,2004, in the local market by Betania for Col$ 300 billion aggregate principalamount.  The proceeds from the sale ofthe bonds were used in full to prepay other outstanding debt.

 

**C.**            Research and development, patents andlicenses, etc.

** **

One of Endesa Chile’s main strengths is constantdevelopment of initiatives oriented to improve and create procedures andtechnological applications that optimize the management of productiveprocesses, an activity that as of 2005 benefits from the creations of an entitythat coordinates all the potential expansion initiative and manages singularand dispersed performances.

 

For this reason, Endesa Chile created during 2005 “Subgerenciade technología, innovación y soporte técnico”, that has among other objectivesthe responsibility to give incentive, coordinate and to systematize all theinitiatives related to investigations, innovations and the adoption of newtechnologies that add value to the business.

 

During 2005 diverse activities were developed with theintention to create a systematized atmosphere for activities related toinnovations.  Among them the followingexamples can be mentioned:

 

At the beginning of the year an electronic survey onthe subject of innovation was held where 80.4% of the workersparticipated.  As a consequence of theresults obtained an action plan was developed to reformulate the InnovationProgram in aspects such as diffusion, formation (enhancing the ability todiscover), greater frequency in assigning awards, thematic (general anddirected to necessities), total coverage and on the approach of the differentprocesses (material, information and business).

 

During September there were different awardceremonies carried out in the power plants of the company and in Santiago, withthe purpose of rewarding those who participated in the Program of Innovationand Creativity, for the period of May through July.  During this time 95 proposals were received,of which 44 were approved.

 

In November a seminar called “StrategicManagement of the Innovation” was held in Santiago, given by the professors ofthe Center of Executive Education of University Adolfo Ibáñez, with the purposethat the main executives of Endesa Chile in Latin America, would share theimportance of innovation for the strategy and competitiveness of the companiesat the present time, and also share a common language on the subjects ofinnovation and technology within the organization.

 

In December a project began, which is expected tobe concluded by the first quarter of 2006, in order to determine the presentstate of the innovation systems in management and to define a strategic planfor innovation and technology Endesa Chile subsidiaries and its companies andof delegated management, under the premises of benefiting from theorganizational synergies in order to coordinate the efforts in innovation basedon the strategic vision of the company.

 

Finally, Endesa Chile contributed U.S.$ 0.6million in both 2004 and 2005 to the Huinay Foundation, which develops itsactivities in the San Ignacio del Huinay farm, located in Hualaihué, in thetenth Region of Chile.  Among the purposeand mission of the Foundation are: to evaluate, design, develop and execute anecological project inspired by the concept of sustainable and ecologicaldevelopments, that can serve as a model for other operation and projects in thecountry; to promote and develop scientific research and the experimentationaimed to achieve the previous objectives; to manage educational establishmentsand training programs; and to distribute courses for educational andoccupational purposes, and to provide material aid or help of any other natureby means of 

 

103

----

 

programs of social action in benefit of citizen in sectors of greaternecessity, in particular of local or bordering inhabitant to or the zones wherethe project is executed.

 

**D.**            Trend information

 

In general terms, no trends can be easily establishedfor the energy business in the five countries in which we operate.  However, we have identified the followingthemes: There is a tendency toward greater competition in some countries,combined with a liberalization of regulated markets, and the introduction, orproposed introduction, of trading companies that will market energy to finalclients.  This would give us access to awider universe of customers, allowing us to compete to serve higher marginclients.  The tendency toward theinterconnection of electricity systems, including systems that crossinternational borders, is changing due to increasing difficulties in theelectricity supply from Argentina to Brazil, and the gas supply from Argentinato Chile.  In this moment, the tendencyis the use of local sources of energy, or internationally traded fuels thateliminates the dependency of  a singlesupplier.

 

Our ability to rely on natural gas from Argentina isincreasingly uncertain, because of natural gas restrictions applied by theArgentine government.  See “Item 3. KeyInformation—D. Risk Factors.”

 

**E.**              Off-balance sheet arrangements

 

Endesa Chile is not a party to any off-balance sheettransactions.

 

**F.**              Tabular disclosures of contractualobligations

 

**Payment obligations due by period (in U.S.$ million)**

**ENDESA CHILE on a consolidated basis**

 
| **As of December 31, 2005**             | ** ** | **TOTAL** | ** ** | **Jan 2006 -  Dec 2006** | ** ** | **Jan 2007 -  Dec 2007** | ** ** | **Jan 2008 -  Dec 2008** | ** ** | **Jan 2009 -  Dec 2009** | ** ** | **After  Dec 2009** | ** ** |
|----------------------------------------------|------------|-----------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|---------------------|------------|
| Bank Debt                                    |       | 373       |       | 80                       |       | 86                       |       | 26                       |       | 29                       |       | 152                 |       |
| Local Bonds  (1)                             |       | 1,257     |       | 404                      |       | 60                       |       | 30                       |       | 180                      |       | 584                 |       |
| Yankee Bonds  (2)                            |       | 2,103     |       | 211                      |       | 25                       |       | 400                      |       | 620                      |       | 846                 |       |
| Other Debt  (3)                              |       | 223       |       | 66                       |       | 33                       |       | 28                       |       | 20                       |       | 77                  |       |
| Interest  Expenses                           |       | 2,499     |       | 294                      |       | 249                      |       | 236                      |       | 185                      |       | 1,534               |       |
| Pension and  Post-retirement Obligations (4) |       | 77.9      |       | 5.5                      |       | 5.1                      |       | 4.9                      |       | 4.6                      |       | 57.9                |       |
| Contractual  Operational Obligations (5)     |       | 839       |       | 243                      |       | 229                      |       | 124                      |       | 122                      |       | 121                 |       |
| Operational  Leases (6)                      |       | —    |       | —                   |       | —                   |       | —                   |       | —                   |       | —              |       |

 

----

 
| (1)    | Includes net payment from the Endesa Chile’s  Currency Swap of U.S.$ 22.9 million.                                                                                                                                                                                                                                                                                                               |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |
| (2)    | Includes Private Placements of Pehuenche S.A.  for U.S.$25 million, previously  accounted for as Bank Debt.                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |
| (3)    | Includes Endesa Chile capital lease obligations  for a total of U.S.$47.7 million and the Mutual Financing Agreement with  Peruana de Energía S.A. (Perené) of U.S.$8.8 million and includes  Hidroinvest’s debt for U.S.$9.6 million. Additionally includes Endesa Costanera debt with Mitsubishi  Corporation for U.S.$156.9 million.                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |
| (4)    | All of our pension and  post-retirement plans are unfunded. Cash flows estimated in the table are  based on future undiscounted payments necessary to meet all of our pension  and post-retirement obligations.                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |
| (5)    | “After  December 2009” figure corresponds to the expected weighted average  yearly obligation. In addition to the contractual operational obligations set  forth above, annual payments of electricity purchase contacts that correspond  to derivative instruments are quantified in “Item 11. Quantitative and  Qualitative Disclosure about Market Risk—Commodity Price Risk.” |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |
| (6)    | We do not have any  material operating lease obligations.                                                                                                                                                                                                                                                                                                                                                       |

 

104

----

 

**G.**            Safe Harbor

 

The information in this “Item 5.  Management Discussion and Analysis,” containsstatements that may constitute forward looking statements.  See “Forward Looking Statements” in the “Introduction”of this report, for safe harbor provisions.

 

**Item 6.**           Directors, Senior Management and Employees

 

**A.**       Directors and Senior Management

 

We are managed by our Board of Directors, whichconsists of nine members who are elected for a three-year term at a GeneralStockholders’ Meeting.  If a vacancyoccurs in the interim, the Board of Directors will elect a temporary directorto fill the vacancy until the next regularly scheduled stockholders’ meeting,at which time the entire Board of Directors will be elected.  With the resignation of two directors in2005, Andres Regué G. in July, and Ignacio Blanco F. in October, the entireBoard will be up for election on the next stockholders meeting to be held on March 21,2006.  Our Executive Officers areappointed by the Board of Directors and hold office at the discretion of theBoard.  Set forth below are the membersof our Board of Directors and Executive Officers as of December 31, 2005.

 
| **Name**                        | ** ** | **Position**  | ** ** | **Current Position  Held Since** | ** ** | **Expiration of  Current Term** | ** ** |
|---------------------------------|------------|---------------|------------|----------------------------------|------------|---------------------------------|------------|
| **Directors**                   | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| ** **                      | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Luis Rivera N. (1)              |       | Chairman      |       | 2002                             |       | 2006                            |       |
| Antonio Pareja M.               |       | Vice Chairman |       | 2000                             |       | 2006                            |       |
| Jaime Bauzá B. (1)         |       | Director      |       | 1999                             |       | 2006                            |       |
| José Fernández O. (2) |       | Director      |       | 2005                             |       | 2006                            |       |
| Enrique García A. (2)      |       | Director      |       | 2003                             |       | 2006                            |       |
| Héctor López V.       |       | Director      |       | 2005                             |       | 2006                            |       |
| Carlos Torres V.                |       | Director      |       | 2002                             |       | 2006                            |       |
| Antonio Tuset J. (1) (2)   |       | Director      |       | 1999                             |       | 2006                            |       |
| Leonidas Vial E.                |       | Director      |       | 1995                             |       | 2006                            |       |

 
| **Name**                   | ** ** | **Position**                               | ** ** | **Current Position  Held Since** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|----------------------------------|------------|
| **Executive Officers**     | ** ** | ** **                                 | ** ** | ** **                       | ** ** |
| ** **                 | ** ** | ** **                                 | ** ** | ** **                       | ** ** |
| Rafael Mateo A.            |       | Chief Executive Officer                    |       | 2005                             |       |
| Juan Benabarre B.          |       | Production & Transmission Officer |       | 2005                             |       |
| Rafael Errázuriz R.   |       | Energy Planning Officer                    |       | 2001                             |       |
| Renato Fernández B.   |       | External Affairs Officer                   |       | 2003                             |       |
| Alejandro González D. |       | Chief Financial Officer                    |       | 2003                             |       |
| Claudio Iglesis G.         |       | Generation Chile Officer                   |       | 1999                             |       |
| Carlos Martín V.      |       | General Counsel                            |       | 1996                             |       |
| Juan Carlos Mundaca A.     |       | Human Resources Officer                    |       | 2000                             |       |
| Julio Valbuena S.          |       | Planning & Control Officer        |       | 2002                             |       |
| José Venegas M.       |       | Trading & Marketing Officer       |       | 2001                             |       |

 

----

(1)          Memberof the Director Committee.

 

(2)          Memberof Audit Committee.

 

105

----

 

**Directors**

 

***Luis Rivera N.***became Chairman of the Board of Directors in July 2002.  In 1998, he first joined Endesa-Spain asExecutive Vice President.  Mr. Riverais currently Managing Director and Board Member of *EndesaInternacional S.A.*(“Endesa Internacional”), a wholly-ownedsubsidiary of Endesa-Spain.  Mr. Riverahas served as a director of Endesa-Spain subsidiaries including *Compañía Sevillana de Electricidad* and Enersis.  Prior to joining the Endesa Group, hehad worked as a consultant for McKinsey & Company (“McKinsey”)since 1986 and became a partner at that firm in 1991.  At McKinsey, he specialized in the energy andfinancial sectors.  Mr. Rivera holdsdegrees in Civil Engineering from *Universidad Politécnica deMadrid* and an M.B.A. from INSEAD.

 

***Antonio Pareja M****.* became Vice Chairman of the Board of Directors in August 2000.  Since 1986, Mr. Pareja has held variouspositions at Endesa-Spain, including Corporate Planning Officer.  Currently, Mr. Pareja is CorporateServices & Technology Director, a member of the Executive Committee ofthe Endesa Group, as well as Vice Chairman of Endesa Chile.  Mr. Pareja has served as Vice Chairmanof *ENHER*, *GESA*and *Nansa*, and as a Director of *Compañía Sevillana*, *Fecsa* and *Red Eléctrica de España*. Prior to joining the Endesa-Spain Group, he was General Manager forControl in *SEAT*, the Spanish subsidiary ofVolkswagen AG.  He holds a degree ineconomics and a graduate degree from the London Business School and *Instituto Empresa*.

 

***Jaime Bauzá B****.*became a Director in May 1999.  From 1990 to May 1999, Mr. Bauzáserved as Chief Executive Officer of Endesa Chile.  He joined Endesa Chile in May 1990 aftermore than twenty years in the electricity sector.  Mr. Bauzá was the Chief ExecutiveOfficer of Endesa Chile’s subsidiary, *Empresa Eléctrica**Pehuenche S.A.* (“Pehuenche”) from1987 to April 1990 and Chairman of *Gener S.A.*(formerly *Chilgener S.A.*) from 1987 to1989.  Mr. Bauzá also served asChief Executive Officer of *Gener S.A.*from 1981 to 1987.  He holds a degree incivil engineering from the *Pontificia UniversidadCatólica de Chile*.

 

***José Fernández O.*** became a Director in July 2005.  From 1996 to April 2005, he was aConsultant of Endesa-Spain and Chairman of the Board of *Aldeasa*.  Currently, he is also a member of the Boardof Directors of *TYP (Grupo Pascual*).  Mr. Fernández holds a Bachelor’s degreein Entrepreneurial and Economic Science from *UniversidadComplutense de Madrid* and a doctoral degree in Mining Engineeringfrom *Universidad Politécnica de Madrid*.  He has been a professor of *Universidad Complutense de Madrid* in Commerce andInternational Financing and a professor of *Universidad Politécnica deMadrid* in the doctoral program in Energy Economy.

 

***Enrique García A.*****became a Director in September 2003.  From January 1999 to September 2003,he served on the Board of Directors of*Distrilec Inversora*and*Edesur*, both subsidiaries of Enersis.  Mr. García was the Chief Executive Officerof Enersis from May 1999 to July 2003 and he has also served asTechnical Director of Endesa-Spain between 1992 and 1997 and DistributionDirector from 1997 to 1999.  Mr. Garcíaholds a degree in civil engineering from the *EscuelaTécnica Superior de ICCP* of Madrid.

 

***Héctor López V.***became a Director in October 2005 and is currently Energy ManagementDirector of Endesa Internacional. From August 2000 through August 2005 he was the ChiefExecutive Officer of Endesa Chile.  From November 1997to August 2000, he was nominated to the Board of Directors of EndesaChile, serving as Vice Chairman since May 1999.  Mr. López has occupied various positionsat Endesa-Spain including Director of International Finance and Capital Markets(1985-1992), member of the Management Committee, Deputy Managing Director ofEndesa Internacional (1997-2000) and Adjunct Financial Director ofEndesa-Spain (1996-1997).  Mr. Lópezholds degrees in law and economics from ICADE, Madrid.

 

***Carlos Torres V.***became a Director in 2003.  Mr. Torresis currently the Corporate Strategy Director of Endesa-Spain.  In addition, Mr. Torres has served asconsultant and partner at McKinsey since January 1997, with a focus in theenergy industry.  Mr. Torres holds adegree in electrical engineering from the Massachusetts Institute of Technology(“M.I.T.”), a law degree from *Universidad Nacional deEducación a Distancia* and an M.B.A. from M.I.T.

 

***Antonio Tuset J****.* became a Director in June 1999.  Mr. Tuset is also a director of *CISA S.A.*, *Fanaloza S.A.*,*Banmédica S.A.*, *CIMENTA*, *MutuosHipotecarios S.A.*, *SCL Terminal Aéreo deSantiago S.A.,**IndustriasTricolor S.A.*, *Muelles de Penco S.A.*,*Wenco S.A., and MASISA S.A.*  Mr. Tuset holds a degree in commercialengineering from the *Universidad de Chile*.

 

106

----

 

***Leonidas Vial E****.* became a Director in April 1995.  Mr. Vial has been Vice Chairman ofthe Santiago Stock Exchange since June 1988, as well as a director of *Empresas Santa Carolina S.A., Cía. Industrial El Volcán S.A.*,*Inversiones Industriales Colina S.A.,Inversiones Industriales Lo Valdés S.A.* and *Las Américas Cía. de Seguros de Vida S.A.*, none ofwhich are related to the Endesa Group.

 

**Senior Management—Executive Officers**

** **

***Rafael Mateo A****.*became Chief Executive Officer in September 2005,after serving as Production & Transport Officer since August 1999.  Prior to that, from January 1997 to July 1999,he was the Production Deputy Director of Endesa-Spain.  He was also Chairman of the European ThermalProduction Group of *Unipede* inBrussels.  He joined theEndesa Group in 1982, where he held the positions of Power StationDirector and Thermal Production Director of Endesa-Spain.  He holds a degree in industrial engineeringfrom *Universidad de Zaragoza* and M.B.A. degreesfrom *Instituto de Estudios Superiores de la Empresa*(“IESE”) and INSEAD.

 

***Juan Benabarre B*.**became the Production & Transmission Officer in October 2005.  Mr. Benabarre has held several positionsin Endesa Chile and its subsidiaries since 1981.  Between 2000 and 2005, he was Ingendesa’sCEO.  Between 1996 and 1999, he was aProject Director at our former transmission company, *Transelec*.  Currently, Mr. Benabarre is Chairman ofIngendesa and Endesa Eco*,*our company**dedicated to developing renewable energy projects.  Since 2000, he has served as a Director ofEdegel, *Generandes*, *Etevensa*(an affiliated company), and GasAtacama, and since 2004, as a Director of *Cabo Blanco*.  Mr. Benabarreholds a degree in mechanical civil engineering from *Universidadde Chile*, and has graduate studies in geothermal energy from theUniversity of Auckland, New Zealand, as well as an M.B.A. from *Universidad Adolfo Ibáñez*.

 

***Rafael Errázuriz R.*****has been the Energy Planning Officer since June 2001.  Mr. Errázuriz was the Chief ExecutiveOfficer of Emgesa, a Colombian subsidiary of Endesa Chile, from April 1999to June 2001.  He joined EndesaChile in 1997 and holds a degree in civil engineering from *Universidadde Santiago*.

 

***Renato Fernández B****.* has been the External Affairs Officer since August 2003,when he joined Endesa Chile.  Prior tothat, he was the External Affairs Director of Smartcom PCS from December 2000to July 2003.  From December 1997to December 2000, Mr. Fernández was the External Affairs Director of *Hill & Knowlton Captiva*.  He holds a degree in Journalism from *Universidad Gabriela Mistral*.

 

***Alejandro González D****.* became the Chief Financial Officer in August 2003.  From January 2002 to July 2003, hewas deputy CFO.  Prior to that, from June 2001to December 2001, he was a senior analyst in Planning and Control.  He joined Endesa Chile in 1996.  Mr. González holds a degree in Economicsfrom the *Universidad de Chile* and an M.B.A. fromthe University of California at Los Angeles.

 

***Claudio Iglesis G.***has been the Generation Director since July 1999.  He joined Endesa Chile in 1982.  He has been Chief Executive Officer of Emgesaand Betania, both Colombian subsidiaries of Endesa Chile, and Central BuenosAires, currently part of Endesa Chile’s subsidiary Endesa Costanera inArgentina. Mr. Iglesis was director of CAMMESA and Chairman of the AGEERAin Argentina.  He holds a degree inelectric civil engineering from Universidad de Chile.

 

***Carlos Martín V****.* became the General Counsel in May 1996.  He had served as the General Counsel ofEnersis prior to that, which he joined in 1989. He holds a law degree from the *Universidad Católica deValparaíso* and a doctor in law degree from the *Universidadde Navarra.*

 

***Juan Carlos Mundaca A.***has been the Human Resources Officer since June 2000.  Prior to that, from January 1998 to May 2000,he was Human Resources Director of Chilectra, an Enersis’ subsidiary ofEnersis.  Mr. Mundaca has alsoserved as Customer Service Director and Branch Director of Chilectra, where hejoined in 1974.  Mr. Mundaca holds adegree in commercial engineering from the *Universidad de Santiago*.

 

***Julio Valbuena S****.* is the Planning and Control Officer since July 2002.  Mr. Valbuena was the Planning andControl Director of Endesa Energía (in Spain) from 1998 to June 2002.  He holds an Executive M.B.A. from the *Instituto de**Estudios Superiores de laEmpresa (“IESE”)* of Madrid and a degree in civil engineering fromthe *Escuela Técnica Superior de Ingenieros de Caminos,Canales y Puertos* of the *Universidad Politécnica deMadrid*.

 

107

----

 

***José Venegas M.***became the Trading & Marketing Officer on June 1, 2001.  Mr. Venegas joined the Company in1992.  He has also served as Planning andEnergy Officer from June 2000 to April 2001, Commercial Officer from September 1997to May 2000 and Director of the Economic Load Dispatch Center (CDEC) ofthe SIC during 1997.  Mr. Venegasholds a degree in industrial civil engineering from the *PontificiaUniversidad Católica de Chile* and a M.B.A. from the *Universidad Adolfo Ibáñez*.

 

**B.**            Compensation

 

At the regular shareholders’ meeting held on April 8,2005, our shareholders maintained the compensation policy for the board ofdirectors approved last year.  Eachdirector will receive a fixed salary of 55 UF per month and a fee of36 UF for attending meetings of the board. The vice-chairman will receive a fixed salary of 82.5 UF per monthand a fee of 54 UF for attending meetings of the board.  The chairman will receive a fixed salary of110 UF per month and a fee of 72 UF for attending meetings of theboard.  In 2005, the total compensationpaid to each director in millions of Chilean pesos, was as follows:

 
| ** **                 | ** ** | **Year ended December 31,  2005 (In thousands of Ch$)** | ** ** |
|----------------------------|------------|--------------------------------------------------------------|------------|
| **Director**               | ** ** | **Board  Compensation  From Endesa  Chile**                  | ** ** | **Board  Compensation  From  Subsidiaries** | ** ** | **Director  Committee** | ** ** | **Participation** | ** ** | **Total** | ** ** |
| Luis Rivera N              |       | 39,182                                                       |       |   |   | 7,750 |   |   |   | 46,932 |   |
| Antonio Pareja M.          |       | 27,453                                                       |       |   |   |   |   |   |   | 27,453 |   |
| Jaime Bauzá B.        |       | 19,591                                                       |       |   |   | 7,750 |   |   |   | 27,341 |   |
| Andrés Regué G.  |       | 9,153                                                        |       | 6,150 |   |   |   |   |   | 15,303 |   |
| Antonio Tuset J.           |       | 19,591                                                       |       |   |   | 9,687 |   |   |   | 29,278 |   |
| Leonidas Vial E.           |       | 18,298                                                       |       |   |   |   |   |   |   | 18,298 |   |
| Ignacio Blanco F           |       | 12,418                                                       |       |   |   |   |   |   |   | 12,418 |   |
| Carlos Torres V            |       | 17,013                                                       |       |   |   |   |   |   |   | 17,013 |   |
| José Fernández O |       | 10,777                                                       |       |   |   | 1,937 |   |   |   | 12,714 |   |
| Héctor López V   |       | 6,528                                                        |       |   |   |   |   |   |   | 6,528 |   |
| Enrique García A      |       | 19,591                                                       |       |   |   | 1,937 |   |   |   | 21,528 |   |
| **Total**                  | ** ** | **199,595**                                                  | ** ** | **6,150** | ** ** | **29,061** | ** ** | ** ** | ** ** | **234,806** | ** ** |

 

We do not disclose, to our shareholders or otherwise,information on individual Executive Officers’ compensation.  For the year ended December 31, 2005,the aggregate compensation (including performance-based bonuses) of ourExecutive Officers, either paid or accrued, excessively exact Ch$ 2,047million.  Executive Officers are eligiblefor variable compensation under a bonus plan. Endesa Chile provides for its Executive Officers an annual bonus planfor meeting company-wide objectives and for their individual contribution tothe Company’s results.  The annual bonusplan provides for a range of bonus amounts according to hierarchicallevel.  The bonuses eventually paid toexecutives consist of a certain number of gross monthly salaries.  The total variable compensation paid in April 2005was Ch$ 518 million and is included in the aggregate compensation.

 

The amounts set aside or accrued by the Company in2005 to provide pension, retirement or similar benefits totaled Ch$ 227million.  No severance indemnities werepaid in 2005 to the company’s Executive Officers.

 

**C.**            Board practices

** **

***CorporateGovernance***

*** ***

Endesa Chile is managed by its Executive Officersunder the direction of its Board of Directors which, in accordance with the *estatutos*, or articles of incorporation and bylaws, ofEndesa Chile, consists of nine directors who are elected at the annual regularshareholders meeting.  Each directorserves for a three-year term and the term of each of the nine directors expireson the same day.  Staggered terms are notpermitted under Chilean law.  If avacancy occurs on the board during the three year term, the board of directorsmay appoint a temporary director to fill the vacancy.  In addition, the vacancy will trigger anelection for every seat on the board of directors at the next regular annualshareholders’ meeting.  The current boardof directors was elected in March 2004, nevertheless, in

 

108

----

 

2005 two vacancies occurred, and therefore, a new board of directorsmust be elected in the next annual regular shareholder’s meeting on 2006.  See Item 6.A—Directors and Senior Management,for more details on the disclosure of the terms of the directors’offices.  The members of the board of directors do nothave service contracts with Endesa Chile or any of its affiliates that providebenefits upon termination of employment.

 

Chilean corporate law provides that a company’s boardof directors is responsible for the management, administration andrepresentation of a company in all matters concerning its corporate purpose,subject to the provisions of the company’s *estatutos* andthe stockholders’ resolutions.  Inaddition to the *estatutos*, the Board of Directorsof Endesa Chile has adopted regulations and policies that guide our corporategovernance principles.  The mostimportant of these regulations and policies are the following:

 

The Internal Regulations on Conduct in SecuritiesMarkets was approved by the Board on June 2002, which determines the rules ofconduct that must be followed by members of the Board of Directors, seniormanagement and other managers and employees who, due to the nature of their jobresponsibilities, may have access to sensitive or confidential information,with a view to contributing to transparency and to the protection ofinvestors.  These regulations are basedon the principles of impartiality, good faith, placing the company’s interestsbefore one’s own, and care and diligence in using information and acting in thesecurities markets.

 

The Charter Governing Executives (“*Estatuto del Directivo*”), approved by the Board in July 2003,and the Employees Code of Conduct, which develop our principles and values,establish the rules governing dealings with customers and suppliers, andestablish the principles that should be followed by employees in their work:ethical conduct, professionalism and confidentiality.  They also impose limitations on theactivities our senior executives and other employees may undertake outside thescope of their employment with us, such as non-compete limitations.

 

The above regulations and rules reflect our coreprinciples of transparency, respect for stockholders’ rights, and the duty ofcare and loyalty of the directors imposed by Chilean law.

 

***Compliance withNYSE Listing Standards on Corporate Governance***

*** ***

Following is a summary of the significant differencesbetween our corporate governance practices and those applicable to domesticissuers under the corporate governance rules of the New York StockExchange.

 

*Independenceand Functions of the Audit Committee*

* *

Under the NYSE corporate governance rules, all membersof the Audit Committee must be independent. We are subject to this requirement as of July 31, 2005.

 

Under the NYSE corporate governance rules, the auditcommittee of a U.S. company must perform the functions detailed in the NYSEListed Company Manual Rules 303A.06 and 303A.07.  Non-U.S. companies have been required tocomply with Rule 303A.06 beginning July 31, 2005.  Non-U.S. companies are not required to complywith Rule 303A.07.  As of July 31,2005 we comply with both the independence and the functional requirements of Rule 303A.06.  As required by the Sarbanes Oxley Act and theNYSE corporate governance rules, on June 29, 2005 the Board of Directorsof Endesa Chile created an Audit Committee, composed of three directorsmeeting the independence requirements of the NYSE: Mr. José Fernandez O., Mr. AntonioTuset J. and Mr. Enrique García A.  Mr. JoséMaría Fernandez Olano, is relying on the exemption provided by Rule 10A-3(b)(1)(iv)(B). Mr. Fernandez Olano sits on the board of directors of EndesaInternacional, S.A., an affiliate of the Company.  Mr. FernandezOlano otherwise meets the independence requirements of Rule 10A-3(b)(1)(ii).

 

As required by Chilean Law, Endesa Chile also hasa*Comité de Directores*composed of threedirectors.  Although Chilean Law requiresthat a majority of the *Comité de Directores*(two out of three members) must be composed of directors who were not nominatedby the controlling shareholder and did not seek votes from the controllingshareholder (a “non-control director”), it permits the *Comité deDirectores*to be composed of a majority or even a unanimity ofcontrol directors, if there are not sufficient non-control directors on theboard to serve on the committee. Currently, our *Comité de Directores*is composed of one non-control director and of two directors appointed by thecontrolling shareholder.

 

109

----

 

*CorporateGovernance Guidelines*

* *

The NYSE’s corporate governance rules requireU.S. listed companies to adopt and disclose corporate governanceguidelines.  Chilean law does notcontemplate this practice, other than with respect to the codes of conductdescribed above.

 

***Committees andOther Advisory Bodies***

*** ***

*Director’sCommittee*

* *

The *Comité de Directores*is composed of three members who are simultaneously directors of theCompany.  It performs the followingfunctions:

 

•                  examination ofAnnual Report, Financial Statements and the Reports of the External Auditorsand Inspectors of the Accounts;

 

•                  formulation ofthe proposal to the Board of Directors for the selection of external auditorsand private rating agencies:

 

•                  examination ofinformation related to operations by the Company with related parties and/orrelated to operations in which the Company board members or relevant executiveofficers may have personal interest;

 

•                  examination ofthe remuneration framework and compensation plans for managers and executiveofficers; and

 

•                  any otherfunction mandated to the committee by the estatutos, the board of directors orthe shareholders of the company.

 

The members of this Committee are Luis Rivera Novo,Jaime Bauzá Bauzá and Antonio Tuset Jorrat.

 

**D.**            Employees

 

The following table provides the total number ofemployees of our Companies for the last three fiscal years:

 
| **Company**                  | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **In Argentina**             |       |       |       |       |       |       |       |
| Endesa Costanera        |       | 233        |       | 262        |       | 262        |       |
| El Chocón.         |       | 50         |       | 49         |       | 49         |       |
| Total personnel in Argentina |       | 283        |       | 311        |       | 311        |       |
|                         |       |       |       |       |       |       |       |
| **In Brazil (1)**            |       |       |       |       |       |       |       |
| Cachoeira Dourada            |       | 53         |       | 53         |       | 0          |       |
| Total personnel in Brazil    |       | 53         |       | 53         |       | 0          |       |
|                         |       |       |       |       |       |       |       |
| **In Chile**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Endesa Chile                 |       | 466        |       | 473        |       | 484        |       |
| Pehuenche                    |       | 3          |       | 3          |       | 3          |       |
| Pangue                       |       | 0          |       | 0          |       | 0          |       |
| San Isidro                   |       | 2          |       | 2          |       | 0          |       |
| Celta                        |       | 1          |       | 1          |       | 1          |       |
| Ingendesa (2)                |       | 211        |       | 221        |       | 253        |       |
| Túnel El Melón     |       | 25         |       | 25         |       | 24         |       |
| Total personnel in Chile     |       | 708        |       | 725        |       | 765        |       |
|                         |       |       |       |       |       |       |       |
| **In Colombia**              |       |       |       |       |       |       |       |
| Emgesa                       |       | 285        |       | 285        |       | 292        |       |

 

110

----

 
| Betania                                           |   | 34     |   | 34     |   | 34     |   |
|---------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Total personnel in Colombia                       |   | 319    |   | 319    |   | 326    |   |
|                                              |   |   |   |   |   |   |   |
| **In Peru**                                       |   |   |   |   |   |   |   |
| Edegel                                            |   | 152    |   | 154    |   | 158    |   |
| Total personnel in Peru                           |   | 152    |   | 154    |   | 158    |   |
|                                              |   |   |   |   |   |   |   |
| Total personnel of Endesa Chile and  Subsidiaries |   | 1,515  |   | 1,562  |   | 1,560  |   |

 

----

| (1)    | As of October 1,  2005 Centrais Elétricas Cachoeira Dourada S.A. is no longer a subsidiary  of Endesa Chile. See “Item 4. Information on the Company C. Organizational  Structure” for details. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                     |
| (2)    | Ingendesa figure  includes Ingendesa employees located in Peru and employees of Ingendesa’s  subsidiary in Brazil.                                                                                                  |
|   |                                                                                                                                                                                                                     |
|   | The following table  provides the total number of temporary employees of our companies for the  last three fiscal years:                                                                                                 |

 
| **Company**                                                 | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **In Argentina**                                            |       |       |       |       |       |       |       |
| Endesa Costanera                                       |       | 0          |       | 0          |       | 0          |       |
| El Chocón                                         |       | 0          |       | 0          |       | 0          |       |
| Total temporary personnel in Argentina                      |       | 0          |       | 0          |       | 0          |       |
|                                                        |       |       |       |       |       |       |       |
| **In Brazil (1)**                                           |       |       |       |       |       |       |       |
| Cachoeira Dourada                                           |       | 0          |       | 0          |       | 0          |       |
| Total temporary personnel in Brazil                         |       | 0          |       | 0          |       | 0          |       |
|                                                        |       |       |       |       |       |       |       |
| **In Chile**                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Endesa Chile                                                |       | 2          |       | 9          |       | 3          |       |
| Pehuenche                                                   |       | 0          |       | 0          |       | 0          |       |
| Pangue                                                      |       | 0          |       | 0          |       | 0          |       |
| San Isidro                                                  |       | 0          |       | 0          |       | 0          |       |
| Celta                                                       |       | 0          |       | 0          |       | 0          |       |
| Ingendesa (2)                                               |       | 294        |       | 133        |       | 272        |       |
| Túnel El Melón                                    |       | 0          |       | 0          |       | 1          |       |
| Total temporary personnel in Chile                          |       | 296        |       | 142        |       | 276        |       |
| ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **In Colombia**                                             |       |       |       |       |       |       |       |
| Emgesa                                                      |       | 1          |       | 0          |       | 0          |       |
| Betania                                                     |       | 0          |       | 0          |       | 0          |       |
| Total temporary personnel in Colombia                       |       | 1          |       | 0          |       | 0          |       |
|                                                        |       |       |       |       |       |       |       |
| **In Peru**                                                 |       |       |       |       |       |       |       |
| Edegel                                                      |       | 1          |       | 3          |       | 9          |       |
| Total temporary personnel in Peru                           |       | 1          |       | 3          |       | 9          |       |
|                                                        |       |       |       |       |       |       |       |
| Total temporary personnel in Endesa Chile  and Subsidiaries |       | 298        |       | 145        |       | 285        |       |

 

----

(1)          Asof October 1, 2005 Centrais Elétricas Cachoeira Dourada S.A. is nolonger a subsidiary of Endesa Chile.  See“Item 4. Information on the Company C. Organizational Structure” for details.

 

(2)          Ingendesahas temporary personnel hired for projects, given the nature of itsbusiness.  Figure includes Ingendesaemployees located in Peru and employees of Ingendesa’s subsidiary in Brazil.

 

111

----

 

All Chilean employees who are dismissed for reasonsother than misconduct are entitled by law to a severance payment.  According to Chilean law, permanent employeesare entitled to a basic payment of one month’s salary for each year (or asix-month portion thereof) worked, subject to a limitation of a total paymentof no more than 11 months’ pay for employees hired after August 14,1981.  Severance payments to employeeshired prior to that date consist of one month’s salary for each full yearworked, not subject to any limitation on the total amount payable.  In addition, under Endesa Chile’s collectivebargaining agreements, Endesa Chile is obligated to make severance payments toall covered employees in cases of voluntary resignation or death, in specifiedamounts that increase according to seniority. We entered into a new collective bargaining agreement with ourengineering personnel in January 2004. This agreement has a term of three years.  In June 2004, the Company reached afour-year collective bargaining agreement with the electro-mechanical,technical and administrative personnel. In October 2005 we entered into a new collective bargainingagreement with plant operators and assistants and with another group ofnon-technical employees in December 2005. Both agreements subscribed in 2005 have a three-year term.  Management believes Endesa Chile’srelationship with its trade unions is a positive one.

 

**E.**              Share ownership.

 

Each of Endesa Chile’s directors and officers ownsless than one percent, if any, of the shares of the Company.  None of Endesa Chile’s directors or officershas any stock options, which are not permitted under current Chilean securitieslaws and regulations.  It is not possibleto confirm whether any of our officers or directors has beneficial, rather thandirect, interest in the shares of Endesa Chile. However, to the best of our knowledge, any potential shareholding by allof the directors and officers of Endesa Chile in the aggregate amounts to muchless than 10% of outstanding shares.

 

**Item 7.**           Major Shareholders and Related PartyTransactions

 

**A.**            Major shareholders.

 

Endesa Chile has only one class of capital stock.  As of December 31, 2005, according toEndesa Chile’s shareholder records, 23,163 registered shareholders held its8,201,754,580 shares.

 

The following table sets out information concerningbeneficial ownership of Endesa Chile’s shares as of December 31, 2005:

 
| ** **                                        | ** ** | **As of December 31, 2005** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **Shares  Beneficially  Owned**  | ** ** | **Percentage of  Total Shares  Outstanding** | ** ** |
| Enersis (1)                                       |       | 4,919,488,794                    |       | 59.98 | % |
| Citibank, N.A.(2)                                 |       | 410,954,700                      |       | 5.01 | % |
| Directors and executive officers (17  persons)(3) |       | 500,403                          |       | 0.01 | % |

 

----

| (1)    | Endesa-Spain, as of  December 31, 2005, directly or indirectly, owned 60.6% of the share  capital of Enersis, which holds 60.0% of Endesa Chile.                                                                                                                                                                                                                         |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                          |
| (2)    | Represents the number  of shares held in the form of ADSs. The ADSs are evidenced by American  Depositary Receipts (“ADRs”). The ADRs are outstanding under a Deposit  Agreement dated as of August 3, 1994 (the “Deposit Agreement”) among  Endesa Chile, Citibank N.A. as depositary and the holders from time to time  of ADRs issued thereunder. |
|   |                                                                                                                                                                                                                                                                                                                                                                          |
| (3)    | Excludes shares held by  Enersis.                                                                                                                                                                                                                                                                                                                                             |

 

Enersis, a holding company engaged in the distributionand, through Endesa Chile, the generation and transmission of electricity inChile, Argentina, Colombia and Peru, beneficially owned as of December 31,2005, directly or indirectly, 60.0% of Endesa Chile’s outstanding capitalstock.  During 2003 Enersis performed aCapital Increase, which resulted in Endesa-Spain reducing its participationdirectly and indirectly from 65% to 60.6% beneficial interest.  On April 13, 1999, Enersis, whichalready owned 25.3% of Endesa Chile, launched a tender offer to purchase up to34.7% of Endesa Chile’s outstanding shares, subject to shareholder approval ofa resolution to increase the maximum percentage of shares that may bebeneficially owned by any one shareholder from 26% to

 

112

----

 

65%.  On April 8, 1999,Endesa Chile’s shareholders passed the resolution and on May 11, 1999,Enersis successfully completed its tender offer for an additional 30% of EndesaChile’s outstanding shares on the Santiago Stock Exchange.  On May 14, 1999, Enersis acquired anadditional 4.7% of Endesa Chile’s shares in a concurrent US tender offer,increasing its ownership interest in Endesa Chile to 60%.

 

On September 5, 2005, Gas Natural SDG, S.A.(“Gas Natural”), a Spanish natural gas supplier, requested authorization fromthe Spanish Securities Market Commission (*Comisión Nacional delMercado de Valores*, or “*CNMV*”) totender for 100% of the share capital of ENDESA, S.A. (“Endesa-Spain”),Enersis’ parent company.  As of the dateof this report, the consideration offered to Endesa-Spain shareholders is € 7.34in cash and 0.569 newly-issued Gas Natural shares for each Endesa-Spain share.

 

On February 21, 2006, E.ON, the Germanmultinational power and gas utility, announced a competing tender offer for100% of the share capital of Endesa-Spain at a price of € 27.50 per share incash.  The offer is conditional on havingE.ON acquire at least 529,481,934 shares of Endesa-Spain, representing 50.01%of Enersis’ parent company’s share capital.

 

**B.**            Related party transactions

 

Article 89 of the Chilean Companies Act requiresthat the Company’s transactions with related parties be on a market basis or onterms similar to those customarily prevailing in the market.  Directors and executive officers of companiesthat violate Article 89 are liable for losses resulting from suchviolation.  The Directors’ Committeeexamines several company operations and contracts with related companies,referred to in Clause 89 of the Companies Law, and reports on these agreementsto the Company’s Board.  In addition, Article 44of the Chilean Companies Act provides that any transaction in which a directorhas a personal interest or is acting on behalf of a third party may be approvedonly when the board of directors has previously been informed and has approvedthe terms of such transaction and that such terms are similar to thoseprevailing in the market.  Resolutionsapproving such transactions must be reported to the Company’s shareholders atthe next shareholders’ meeting. Violation of Article 44 may result in administrative or criminalsanctions to the Company, and shareholders or interested third parties whosuffer losses as a result of such violation have the right to receive compensationin certain situations.  The informationdisclosed corresponds to the latest full fiscal year ended December 31,2005.

 

Our largest electricity distribution customer is *Chilectra S.A.*(“Chilectra”), a subsidiary ofEnersis.  The terms of our contracts withChilectra are regulated in accordance with the Chilean Electricity Law.  For additional information concerning theCompany’s transactions with affiliates and other related parties, see Note 6 tothe audited consolidated financial statements. We believe that we have complied with the requirements of Article 89and Article 44 in all transactions with related parties.

 

It is common practice in Chile to transfer surplusfunds of one company to another subsidiary company that has a cashdeficit.  It is the Endesa group’s policythat all cash inflows and outflows of Endesa Chile and Endesa Chile’s Chileansubsidiaries are managed through a centralized cash management policy incoordination with Enersis.  Theseoperations are carried out through short-term intercompany loans.  Under Chilean law and regulation, suchtransactions must be carried out on an arms’ length basis.  Such centralized cash management is moreefficient for both financial and tax reasons. All of these operations are subject to the supervision of our Board ofDirectors’ Committee.  These transactionsare priced at TIP (variable Chilean interest rate) + 0.05% per month.

 

In other countries in the region in which we dobusiness, these intercompany transactions are permitted but they have adversetax consequences.  Accordingly, we do notmanage the cash flows of our non-Chilean subsidiaries in a centralized manner.

 

Endesa Chile has also made structured loans to itssubsidiaries in Chile, primarily to finance projects and refinance existing indebtedness.  As of December 31, 2005, the outstandingnet balance for such loans was U.S.$ 544 million.  The largest amount outstanding during 2005for such loans to its Chilean subsidiaries was U.S.$ 559 million.  Additionally, Endesa Chile lent money to itsforeign subsidiaries in order to finance foreign investments, in an amount ofU.S.$ 458 million as of December 31, 2005.  The largest amount outstanding during 2005for such loans to its foreign subsidiaries was U.S.$ 501 million.

 

113

----

 

The interest rates on these intercompany loans toEndesa Chile’s Chilean subsidiaries range from 2.3% to 7.0%, with a weightedaverage interest rate of approximately 5.04%. The interest rates on these intercompany loans to Endesa Chile’s foreignsubsidiaries range from 6.94% to 10.14%, with a weighted average interest rateof approximately 8.73%.

 

**C.**            Interests of experts and counsel.

 

Not applicable.

 

**Item8.**           FinancialInformation

 

**A.**            Consolidated Statements and Other FinancialInformation

 

See Item 18 for our consolidated financial statements.

 

**Legal Proceedings**

 

**Chile**

 

***ChileanElectricity Regulations***

 

The Chilean government imposed electricity rationingduring three periods in 1998 and 1999. During these periods, Endesa Chile and other hydroelectric generatorswere required by law to purchase energy from thermal electric generators withsurplus energy.  When the Chileangovernment imposes electricity rationing, it limits the amount of electricitywe can generate during drought conditions or prolonged failures in the country’sthermoelectric facilities.  If, due tothe rationing, we are unable to generate enough electricity to fulfill ourcontracts we may be forced to buy electricity on the electricity pool market atthe spot price.  The spot price may besignificantly higher than our costs to generate the electricity and can be ashigh as the “cost of failure” set by the CNE. The “cost of failure” is determined by the CNE’s economic models as thehighest cost of electricity during periods of drought or electricitydeficiency.  If we are unable to buyenough electricity in the pool market to satisfy all our contracts, then wehave to compensate our regulated customers for the amount of contracted-forelectricity we failed to provide at the “cost of failure.”

 

The first rationing decree was issued for the periodbetween November 13, 1998 and December 31, 1998, though actualrationing took place for only 14 days during this period.  Under the then prevailing Chilean ElectricityLaw, a drought as severe as the one that occurred in 1968-69 constituted “*force majeure*” and provided an exemption from paying thecost of failure for electricity.  Becausethe drought in 1998 was the worst in recorded history, Endesa Chile argued thatthe “*force majeure*” exemption should beapplied and disputed the applicability of failure cost during the firstrationing period.  The dispute wassettled on March 26, 1999 by the Ministry of Economy, which held thatthose transactions carried out in the electricity pool market betweengeneration companies in those node locations and during the hours when theenergy supplied was not sufficient to satisfy the demand had to be calculatedbased on failure costs.  However, theMinistry of Economy did not establish the appropriate procedures to calculatethese failure costs but instead left the matter to be resolved by the SICdispatch center.

 

The second rationing decree period began on April 30,1999 and was eventually superseded by a third rationing decree, which began on June 12,1999 and was extended to August 31, 1999. In the interim, on June 8, 1999, the Electricity Law was amendedand, as a result, extreme hydrological conditions were no longer deemed toconstitute “*force majeure*.”  In addition, the amended Electricity Lawprovided for the compensation of customers in the event of electricityrationing occurring as a result of any hydrological event.  There is no maximum level of compensation.

 

The amended Electricity Law also provided for thepayment of fines by electricity generators of up to a maximum amount ofapproximately U.S.$ 6.5 million per breach resulting from inadequatesupply to the electricity system.  Inrespect of the third rationing decree period Endesa Chile paid U.S.$ 2.3million by way of compensation to customers in 1999.  The amount paid was based on the days andhours in which rationing actually occurred. Endesa Chile contested the payments on the grounds that their powerpurchase agreements with the distribution companies, who in turn provide theelectricity to the final clients, were executed prior to the enactment of the

 

114

----

 

amendment to the Electricity Law and that the amendment could not beapplied retroactively to pre-existing contracts.  Notwithstanding Endesa Chile’s position, theregulatory authorities have asserted that the compensation payments made duringthe third rationing decree were insufficient. Endesa Chile has contested this assertion.  Such conflict was resolved by the executionof Supreme Decree No. 158, which established that Endesa Chile should onlypay for the days rationing effectively took place.  The Chilean courts are currently reviewingthis case.  Even if an unfavorabledecision is reached, we anticipate that it will not have material adverseconsequences on Endesa Chile.

 

Endesa Chile and its subsidiaries and relatedcompanies are parties to legal proceedings arising in the normal course ofbusiness that are not material to Endesa Chile’s consolidated results ofoperations, either individually or in the aggregate.

 

***Transelec***

 

On March 10, 2003, in arbitration proceedings,HQI Transelec Chile S.A., the main owner of the SIC, presented a claimagainst Endesa Chile in which it requested Endesa Chile to pay Ch$ 3.62billion (approximately U.S.$ 5.13 million) by reason of additional tollsand the use of its transmission system in order to supply power to fourcustomers located in the Northern zone of the country.

 

Endesa Chile maintains that it is not required to makethis payment to HQI Transelec Chile S.A. for the aforementioned amountsince, pursuant to the agreements for the basic toll and the additional tollswith that company in compliance with the legislation in force, such basic andadditional tolls for sections located in the zone of influence of its Northernplants (Taltal, Diego de Almagro and Huasco) would be contrary to law if thepower flow were countercurrent.  This isthe case of such customers with which, additionally, Endesa Chile enters intoagreements for uninterrupted supply and, precisely for that supply, EndesaChile does not use the sections of the transmission system which are subject topayment under Transelec.  The discussionperiod of the trial is over and the Court of Arbitration is currently in theanalysis stage.

 

On July 30, 2003 the Court of Arbitration ruledin favor of Endesa Chile, rejecting the lawsuit in all its parts.  HQI filed all their claims against the rulingof the Court of Arbitration and on May 10, 2004 the Court of Appeal ofSantiago confirmed the ruling of the Court of Arbitration.  Following this ruling, HQI presented anannulment suit before the Supreme Court. The Supreme Court rejected the annulment suit in favor of Endesa Chile,therefore ending the proceeding.

 

***Resolution 88***

 

On July 5, 2002, the Company submitted a petitionto nullify Resolution 88 of the Ministry of Economics, which provided for adeviation in the Load Dispatch Center of the SIC.  Resolution 88 provides that an SIC powerdistributor that has exhausted its power supply should be supplemented by allSIC generators, according to their apportioned participation in the SIC, at theregulated price (node price).  The basisfor the Company’s petition was that Endesa Chile considered this resolutionunconstitutional since it breaches the right to property and violates theCompany’s freedom to contract energy.  OnApril 2004 a ruling was made which was unfavorable for Endesa Chile.  The Company has contested such ruling beforethe Court of Appeal, which has not yet been resolved.

 

Although Resolution 88 is still in place, thesituation has temporarily changed in terms of costs to generation companiesbecause of the promulgation of Law 20.018 (Short Law II).  During the period of its effectiveness, from May 19,2005 to December 31, 2008, the generation companies will receive themarginal cost for their non-contracted electricity sales to distributors.

 

***Proceedings forannulment and other actions presented by Punta de Lobos S.A. againstEndesa Chile, Celta and others.***

 

Endesa Chile holds a maritime concession in the zoneof Puerto Patache in Iquique, Chile that allows it to exploit PuertoPatache.  The fixed assets on PuertoPatache belong to Celta. Puerto Patache is principally used for the unloadingof coal, used as the fuel for Celta’s thermal power plant annexed to PuertoPatache.

 

In August 2002, Endesa Chile and its subsidiaryCelta were notified of a petition, in which Punta de Lobos S.A. requestedto nullify the concessions, transfers or any other legal actions undertaken byEndesa Chile for the benefit

 

115

----

 

of Celta concerning the assets that Endesa Chile holds in its maritimeconcession in Puerto Patache.  Punta deLobos also requested the discontinuance of the maritime concession granted toEndesa Chile by the State of Chile. Endesa Chile and Celta responded to the petition arguing that sinceneither the maritime concession nor the concession of the assets that are part ofPuerto Patache represents alienation acts and Endesa Chile has complied withthe laws regulating maritime concessions, the requested discontinuance has nolegal validity.

 

In 2003, Punta de Lobos initiated another suit againstEndesa Chile, Celta and Terminal Marítimo Minera Patache S.A., principallyrequesting to nullify the promise of sale of Puerto Patache by Endesa Chile andCelta to Terminal Marítimo Minera Patache S.A. agreed upon in November 2001.  In February 2003, Punta de Lobos filedanother claim in order to impede new administrative actions related to the saleof Puerto Patache.  The sale has not beenfinalized by an agreement due to a series of legal and administrative actionstaken by Punta de Lobos in an attempt to frustrate the transfer of the maritimeconcession and Puerto Patache from Endesa Chile and Celta to Terminal MarítimoMinera Patache S.A.

 

The three lawsuits filed by Punta de Lobos againstEndesa Chile and Celta were initiated after the decision of Celta to abandonthe request for bids for the purchase of Puerto Patache, which occurred in November 2001.  Punta de Lobos and Terminal Marítimo MineraPatache, who are rivals in the world market of salt, both placed bids forPuerto Patache.  After such declaration,Celta and Endesa Chile initiated private negotiations with Terminal MarítimoMinera Patache that ended in the execution of a promise of sale agreementsubject to certain conditions for the sale of Puerto Patache and the transferof the maritime concession.  Thecontingency of the lawsuits is approximately U.S.$ 15 million.  Currently, due to the existence ofprecautionary measures and that certain contractual conditions have not beenmet, the transfer of Puerto Patache has not been able to be executed.

 

***Divergence of FirmCapacity***

 

In December 2004 Endesa Chile and itssubsidiaries Pehuenche and Pangue filed a public law annulment suit againstMinistry Resolution No. 35 of the Ministry of Economy.  The Ministry of Economy resolved adisagreement among the companies of the CDEC-SIC in relation to the sums of thefirm capacity in 2000-2003 and instructed the CDEC-SIC to redefine the hours ofgreatest probability of loss charge in the system.  This instruction created a series ofconflicts in the CDEC-SIC which were resolved by the creation of the “*Panel de Expertos*” (Experts Panel) in September and December 2004,which resulted in payments on behalf of Pehuenche to other generation companiesin the sum of approximately Ch$ 23 billion.  In a consolidated level the effect of firmcapacity recalculations of 2000-2003 implied a cost to the Company ofapproximately Ch$ 14.5 billion.  Seenote 31 to our consolidated financial statements of our 2004 annual report,filed on Form 20-F, for additional information.

 

Endesa Chile and its subsidiaries have contestedMinistry Resolution No. 35 in court against the Chilean Fisco, the entityof the Chilean Government  requesting thecourt to declare the Resolution invalid on the basis that the Ministry ofEconomy exceeded its authority when enacting it.

 

**Argentina**

 

***Stamp Tax forTransportadora de Gas del Norte S.A. and Endesa Chile***

 

On March 27, 2001, Endesa Chile was notified ofthe Resolution of the administrative agency *Direción Provincial deRentas* in the Neuquén Province against *Transportadorade Gas del Norte S.A.*(“TGN”). This resolution was related to the Stamp Tax charge of $13,943,572Argentine pesos (including tax, interests and penalties calculated on February 28,2001).  On April 5, 2001, TGN filedan appeal before the *Dirección Provincial deRentas* which effectively suspended the obligation of thepayment.  On April 11, 2001, EndesaChile filed an appeal to review the resolution and the process used by the *Provincia* to determine the tax and apply the sanctions.  On November 8, 2001 the *Dirección Provincial de Rentas* notified Endesa Chile ofResolution 591/DPR/2001, which required us to pay the sum ofAr$ 2,784,507.98 (this sum does not include interests and penalties), forthe concept of taxes for the two gas transportation contracts executed by TGNand Endesa Chile.  On November 22,2001 Endesa Chile presented its response against this Resolution.  The ruling of the *DirecciónProvincial de Rentas* is still pending as of the date of this annualreport.

 

116

----

 

**Brazil**

 

***Drawback***

 

In 1998, CIEN received a fiscal incentive (“Drawback”)for the import of goods and equipment for the construction of electricaltransmission lines between Brazil and Argentina, with the suspension of federaltaxes on imports and industrialized products. This fiscal incentive covered goods and equipment imported by March 31,2001.  Prior to that date, CIEN requestedan extension in order to include the import of goods and equipment stillpending for inclusion in the project. The extension of the term for the fiscal incentive was denied and CIENappealed against that decision administratively, and through the courtsobtained a preliminary and provisional decision to ensure the extension of theDrawback to import goods and equipment still required to complete the project.  The judicial demand was resolved in November 2003when DECEX formally denied the extension of the term for the Drawback.  In order to clarify this point it isimportant to stress that this judicial demand had two principal points: (i) toensure the extension of the Drawback to import goods and equipments stillrequired to complete the project; and (ii) to compel DECEX to make knownits opinion.  In addition to the abovementioned matter, the Department of Operations of Exterior Commerce (DECEX) alsopresented an administrative demand, which is currently pending, requesting theannulment of the Drawback.  The Ministryof Development has decided to join these two demands since they refer to thesame topic.

 

CIEN was unexpectedly notified on December 16,2004 by the Brazilian’s Federal Receipt of a tax obligation in an amount ofU.S.$ 86 million corresponding to the Import Duty (II) and Tax onManufactured Products (IPI) relating to certain goods imported in Drawbackregime.  This amount comprises the relevanttax principal amount (U.S.$ 29,500,000), interest accrued(U.S.$ 34,500,000) and penalties (U.S.$ 22,000,000).

 

On January 14, 2005 CIEN appealed against thisnotification, requesting that it be annulled since DECEX has not reached afinal decision regarding the Drawback and for that reason the imports made byCIEN under the Drawback regime should have the import taxes suspended until aresolution is obtained.

 

On March 22, 2005 CIEN received decision number079 from DECEX, which declared the annulment of the Drawback in the lowercourt, retroactively effective to the date of the benefit concession.  Although CIEN had presented its defenseagainst this decision, it received another decision from “DECEX”, decisionnumber 223, keeping the annulment of the concession act.  In April 2005, CIEN presented a requestto obtain the suspension of the decision given, and in October its requestwas denied by the Ministry of Development, Industry and Foreign Commerce,without analysis on the merits.  On February 1,2006 CIEN received the Ministry’s decision, which confirms the annulment of thebenefit of Drawback.  This decisionexhausts the administrative process for the Drawback, thus the next possiblestep is to present a judicial demand in order to discuss the matter.

 

On September 12, 2005 CIEN obtained a sentence inlower court, in the legal administrative of Public Treasury, which partiallyadmits CIEN’s assertion (on imports made by the State of by Rio de Janeiroonly) and continues the inspection procedure for the imports made by the Stateof Rio Grande do Sul.  In October 2005,CIEN appealed this sentence and is waiting for a decision.

 

A final decision against the interests of CIEN couldrepresent a contingency for CIEN of approximately U.S.$ 136 million.

 

***ICMS FiscalIncentives***

 

Under legislation of the State of Rio de Janeiro ineffect at the time when the concession of the fiscal incentives (drawback) fromfederal taxes (as stated in the previous point) was in effect, CIEN would havethe right to obtain drawbacks on imports of goods and equipment for thecarrying out of the electricity transmission line project between Brazil andArgentina, with a suspension of tax (VAT) on the circulation of merchandise andservices—ICMS (state tax).

 

In April 1999, CIEN obtained from the taxauthorities of the State of Rio de Janeiro the drawback related to theICMS.  However, this drawback wascancelled in 2003 by a decree issued by the Legislative Assembly of the Stateof Rio de Janeiro due to differences in legal interpretation regarding theright of CIEN to avail itself of this incentive.  Considering the mentioned Decree in January 31,2004 CIEN decided to integrate the REFERJ (State Tax

 

117

----

 

Restructuring Authority), and the total due amount(U.S.$ 35,897,435.90) is being paid in 120 monthly installments whichbegan in January 2004.  On December 31,2005, the total amount due by CIEN was U.S.$ 27,546,000.

 

***Class ActionSuit Against COPEL and CIEN***

 

In 2001, a class action by the citizens of Paraná wasbrought against CIEN, COPEL, the State of Paraná and its Governor, and theANEEL (the Brazilian electricity regulatory agency).  The class action suit alleges, among otherthings, that the power supply agreement with COPEL and CIEN was not properlyauthorized.  The group is seeking thenullity of the 1999 power supply contract with COPEL and CIEN (currently 400MW) and the suspension of the privatization of COPEL.  If the group of citizens is successful, theenergy contracts between CIEN and COPEL, which represent U.S.$ 107 millionin annual revenues for CIEN, could be nullified.  However, an early termination of thiscontract would allow us to re-contract this energy.

 

In October 2004 CIEN presented its defense and inNovember 23, 2004 CIEN was informed that the term for the presentation ofthe defense of COPEL and Paraná State had expired.

 

On December 16, 2005 the proceeding returned fromthe Federal Public Prosecution Service with a legal opinion dismissing the lawsuit.

 

***Administrative TaxDemand for Federal Taxes***

 

In May 2003, CIEN was notified of anadministrative tax demand brought by the federal tax authorities for amountssupposedly due in relation to “Imposto de Renda Pessoa Jurídica—IRPJ,” “Programade Integração Social—PIS,” “COFINS” and “Contribuição Social sobre LucroLíquido,” incidents concerning financial transactions and exchange fluctuationsoccurring in 1998 and 1999, i.e., when CIEN was still in a pre-operating phase.

 

CIEN presented its defense in July 2003.  On September 28, 2004 the federal taxauthorities issued a resolution partially accepting CIEN’s arguments, andtherefore CIEN appealed on the part that the tax authority did not accept.  This appeal was presented in October 27,2004 and is currently being analyzed by the tax authorities.  The proceeding continues to be analyzed bythe tax authorities.  According to thedefense lawyers and lawyers who gave legal opinions on the matter in 1998 and1999, there is a good probability of a decision favorable to CIEN.  A final decision adverse to CIEN would implya contingency of approximately U.S.$ 7 million.

 

***Demand forAnnulment of Privatization of Cachoeira Dourada***

 

A legal demand was made in 1997 against the State ofGoiás and others mainly requesting the annulment of the privatization ofCachoeira Dourada.  We were only notifiedof this demand in 2002.  CachoeiraDourada responded to the demand by arguing that the demand was inappropriate,as it has challenged the legality and legitimacy of the entire privatizationprocess of Cachoeira Dourada.  CachoeiraDourada also requested to remit the demand to the federal court to decidewhether ANEEL should become a party to these proceedings.

 

The legal demand filed against Cachoeira Dourada didnot call for a specific compensation or damages award.  Additionally, there is no legal precedentthat would enable us to estimate the potential liability.  We are currently awaiting the final decisionon this matter and Cachoeira Dourada’s expectation is to have success in thisdemand.

 

***Administrative TaxDemand***

*** ***

In November 2002, Cachoeria Dourada was notifiedof two administrative tax demands brought by the federal tax authorities, foramounts allegedly due to “Imposto de Renda Pessoa Jurídica – IRPJ” and “ContribuiçãoSocial Sobre o Lucro Líquido – CSLL”, incidents concerning compensation offinancial transactions relating to the lack of transference of fiscal creditfrom CELG to Cachoeria Dourada, which was required when CELG split into twocompanies, CELG and Cachoeira Dourada.

 

Cachoeira Dourada presented its defense and on June 25,2003 the judge gave a preliminary and provisional decision to suspend theenforceable liability.  Cachoeira Douradapresented its appeal requesting clarification of the decision, which was denied.  We appealed from this decision and we arestill waiting for the final decision on this

 

118

----

 

matter.  According to the defenselawyers, there is a good probability of a decision favorable to CachoeiraDourada.  A final decision adverse toCachoeira Dourada would imply a contingency of approximately U.S.$ 5million.

 

***Law No. 10,848of 2004***

 

Two main energy auction systems currently affectCIEN.  The “old energy” system allowsenergy transmission companies that have fully depreciated their property,plant, and equipment to participate in auctions for “old energy.”  Law No. 10,848 of 2004 established a newauction-based system for energy contracts, whereby energy transmissioncompanies that began operations after January 2000 would participate inthis “new energy” auction system.  Thisnew law has had an adverse effect on CIEN. CIEN, as an energy transmission company which imports energy wasconsidered, according to that Law, unable to participate in either type ofauction (old or new energy) due to its status as an import company.

 

 On July 25,2005,CIEN submitted an administrative appeal before the National Agency of ElectricEnergy, or ANEEL, to nullify the effects of Law No. 10,848 of 2004.  Our legal arguments to defend CIEN’sinterests are based on Article 17 of Law No. 10,848, which presentsthe conditions required to contract energy in the new model.  One of these conditions states that thecompany must have initiated its commercial energy transactions after January 1,2000.  Although CIEN is an energytransmission company, it complies with the legal requirements of that law, asit began its activities on June 21, 2000. In addition, Law No. 10,848 conflicts with the agreements signedwith MERCOSUL because it has a different definition of “import company.”  For details, see “Item 4. Information on theCompany—B.Business Overview-Structure of the New Electricity Sector.”  We are currently awaiting the decision of ouradministrative appeal.

 

**Colombia**

 

***Capacity Charge***

 

Resolutions 111 and 077 of 2000, issued by the Energyand Gas Regulatory Commission (“CREG”), amended Resolution 116/96 by declaringthat the hydrological conditions of the years 1991 and 1992 (which were thedriest years in recorded Colombian history) will no longer be used as the basisfor calculating the capacity charge. Instead, hydrological series composed of 24 months each, that correspondto the minimum historical level of the river flow, will be used for purposes ofthis calculation.  The hydrologicalseries considered in this manner have a very low energy contribution, resultingin a reduction of the hydraulic generation used in the model for thecalculation of the

 

*Capacidad Remunerable Teórica*(“CRT”) and benefiting the thermal generation. This new calculation adversely effects our subsidiaries Emgesa andBetania.

 

On December 4, 2000, Emgesa filed a lawsuit inthe Supreme Court of Antioquia, to prevent the CREG from carrying out thecalculation of the capacity charge, which was scheduled for December 22,2000.  Subsequently, Emgesa and Betaniaasked to revoke CREG Resolution 077 of 2000 based on violations of due processand the right of equality.  Both requestswere rejected by the CREG in Resolutions 107 and 109 dated December 18,2000.  Finally, on March 10, 2000,Emgesa and Betania presented an action for annulment against CREG Resolutions077 and 111 of 2000.  As of the date ofthis annual report, the Supreme Court of Antioquia has not resolved thisaction.

 

During years 2000 through 2004 CREG calculated thecapacity charge under the new model for Emgesa and Betania.  Emgesa and Betania filed a lawsuit againstthose calculations before the Supreme Court of Antioquia seeking to reverse thenew calculations.  The ruling of the courtis still pending.

 

In December 2005, CREG calculated the capacitycharge under the new model for Emgesa and Betania.  Emgesa and Betania will file a lawsuit beforethe Supreme Court of Antioquia seeking to reverse the new calculation.  Every year the administrator of theelectricity system (“ASIC”) estimates the capacity charge for the followingyear.  Emgesa and Betania petitioned ASICto revoke the estimates carried out for the years 2001 through 2005.  ASIC rejected all the requests forrevocation.  Subsequently, both companiesdemanded the capacity charge liquidation in a monthly manner.  The Supreme Court of Antioquia has not yetdecided such actions.

 

119

----

 

***Emgesa S.A.Muña Class Action***

 

On August 16, 2001, approximately 4,000inhabitants of the Sibaté-Cundinamarca community filed a class actionenvironmental claim before the Administrative Court of Cundinamarca.  This claim was based on the alleged pumpingof polluted waters from the Bogotá River to the Muña Reservoir for thegeneration of electricity.  Thedefendants are a group of public and private entities, including Emgesa.  The plaintiffs are seeking pecuniary andnon-pecuniary damages of approximately U.S.$ 1.1 billion.  The plaintiffs allege that the pollution hasbeen occurring for several decades.  Itis important to note that Emgesa did not begin generating energy in the MuñaReservoir until the end of 1997, when it was incorporated.

 

In addition, there is a separate claim seeking thedecontamination of the Muña Reservoir, which may present an additionalliability of U.S.$ 3 to 5 million for Emgesa.  On August 30, 2004, Emgesa was notifiedthat the first instance court had agreed with the proposals of certain parties,including Emgesa in the “Pacto de Cumplimiento,” a document which sets forththe obligations of the parties in the event the trial ends due to agreement ofthe parties.  The court’s ruling setsforth the sources and responsibilities for financial issues related to thedecontamination, in particular those in charge of public authorities.

 

The first instance court’s ruling established thatEmgesa is not responsible for the contamination.  On November 5, 2004, a Committee ofMonitoring was appointed to verify the fulfillment of the conditions imposed bythe court.  The Committee will meet everymonth on the third working day (last meeting: December 5, 2005), with thepurpose to present to the judge a report on the advance to the “*Pacto de Cumplimiento*”.

 

Moreover, Empresa de Energía Eléctrica de Bogotá, theprevious owner of the Muña Reservoir, was recently ordered by a judicial rulingto begin the decontamination process of the Muña Reservoir, which may offsetthe amount of damages Emgesa will be responsible for, should the plaintiff prevailin either of these proceedings.

 

**Peru**

 

***SUNAT Income TaxAssessment 1996 - 1999***

 

As a result of a tax audit, the Peruvian TaxAdministration Superintendent (“SUNAT”) initially assessed a U.S.$ 86million income tax claim against Edegel relating to the 1996 spin-off in whichEdegel was formed.  This income tax claimcorresponds primarily to, among other things, excessive tax depreciation forrevalued fixed assets.  SUNAT based itsassessment on the Seventh Transitory and Final Provision of Law No. 27034,which repealed, as of the 1999 accounting period, the option to depreciate therevaluation of fixed assets.  In January 2002,Edegel filed an objection to the assessment and concurrently commencedarbitration proceedings against the Peruvian State, pursuant to its stabilityagreement, in order to resolve the dispute initiated by the SUNAT assessment.

 

Prior to the decision of the arbitrator, whichultimately favored Edegel by deciding that Law No. 27,034 was notapplicable, SUNAT ruled against Edegel repealing its revaluation of its fixedassets.  Edegel appealed this SUNATruling in a petition to the Tribunal Fiscal (Tax Court) on April 10,2002.  The Tribunal Fiscal, adhering tothe arbitration proceedings initiated by Edegel, ruled that the SUNAT ruling wasvoid.  The Tribunal Fiscal ordered SUNATto resolve the disputed issues by taking into account the legal frameworkdetermined by the arbitration and the criteria in Rule VIII in thepreliminary Title of the Ordered Unique Text of the Tax Code, if applicable, inits tax assessment.

 

On July 10, 2003 by an Intendance Resolution No. 0150150000032,SUNAT resolved the controversy and accepted some of Edegel’s claims.  However, regarding Rule VIII in thepreliminary Title of the Ordered Unique Text of the Tax Code, SUNAT determinedthat tax benefits granted by Law No. 26,283 and its regulation (SupremeDecree No. 120-94-EF) were not applicable to Edegel because the 1996spin-off was not valid.  Additionally,SUNAT objected to the market value attributed to the fixed assets Edegelacquired from Talleres Moyopampa.  ThePeruvian tax Authority claimed a tax liability for the fiscal years 1996, 1997,1998 and 1999 in the amount of Peruvian soles 555 million (approximately U.S.$ 159million) in connection with, among other things, the 1996 spin-off that createdEdegel.

 

120

----

 

On August 1, 2003, Edegel appealed SUNAT’s ruling(Intendance Resolution No. 0150150000032) to the Tribunal Fiscal.  Furthermore, in September and November 2003Edegel presented complementary written reports to the Tribunal Fiscal in orderto reinforce its legal and economic position.

 

On November 14, 2003 Edegel accepted some ofSUNAT’s claims and paid approximately U.S.$ 15 million.  However, the most significant claims remainedin controversy (these included excessive tax depreciation for revalued fixedassets, Rule VIII in the Preliminary Title of the Ordered Unique Text ofthe Tax Code and market value of acquired fixed assets).

 

On September 10, 2004, by Resolution RTF No. 06686-4-2004,the Tribunal Fiscal (Tax Court) resolved the controversy and determined that Rule VIIIin the Preliminary Title of the Ordered Unique Text of the Tax Code was notapplicable to Edegel’s spin-off and that SUNAT’s claim on this matter wasvoid.  Accordingly, it ordered SUNAT tomake a new examination of the market value of acquired fixed assets in 1996.

 

On December 23, 2005, Edegel was notified of  SUNAT’s Resolution No. 01501-50000603.  SUNAT accepted most of the revalued amount ofthe assets.  SUNAT assessed Edegel forthe income tax resulting from the reduced appraisal value of two conceptsincluded in such revalued assets resulting in a tax debt of Peruvian soles 30.4million (approximately U.S.$ 8.9 million), plus Peruvian soles 82 million(approximately U.S.$ 24 million) in fines. The Company appealed Sunat’s Resolution, but has decided to pay the taxdebt corresponding to years 1996, 1997, 1998 and part of 1999, applying for aspecial payment benefit approved by Legislative Decree No. 914, thatcreated the  SEAP (Special System ofActualization and Payment of tax debts due to August 30, 2000).  Based on such tax benefit, by paying theamount of Peruvian soles 9,391,281 (approximately U.S.$ 2.8 million), thatwas provisioned, the tax debt and fines corresponding to such years would beextinguished.  For part of year 1999, theCompany will continue the appeal  beforethe Tax Court, defending one of the concepts rejected by SUNAT (“interestsduring construction”).  The tax exposurefor such procedure, provided that the Company applies for SEAP would bePeruvian soles 12,794,718 (approximately U.S.$ 3,752,117) up to December 31,2005.

 

***SUNAT Income TaxAssessment 2000 - 2001***

 

On December 28, 2005, Edegel was also notified ofSUNAT’s Resolutions No. 012-003-0009045 and 012-003-0009044 correspondingto years 2000 and 2001, for a total amount, including interests and penalties,of Peruvian soles 76 million (approximately U.S.$ 22.29 million), of whichalmost 72% corresponds to the depreciation of the revalued assets.  On January 25, 2006, the Company filed apartial claim against such resolutions. The tax exposure for such claim would be Peruvian soles 46,798,002(approximately U.S.$ 13,723,754), including tax-related debt, fines andinterests owed up to December 31, 2005.

 

**SUNAT Sales TaxAssessment**

 

OnDecember 27, 2004 SUNAT assessed a new tax claim on Edegel for an aggregateamount of U.S.$ 8.2 million, including tax, fines and interest(U.S.$ 7.9 million for sales tax and U.S.$ 0.3 million for incometax).  The main reason for this taxassessment is the fact that SUNAT does not acknowledge a transaction betweenEdegel and Generandes Peru S.A. (owner of 63.55% of Edegel’s outstandingstock) that took place in 2000.

 

Thistransaction consists of a technical assistance contract entered into betweenEdegel and Generandes Peru S.A. under which the latter performed anassistance service to the former for the administration and development ofYanango and Chimay Projects.  To carryout its obligations under this agreement, Generandes Peru S.A. contractedits shareholders Entergy Power Peru S.A. (currently Southern Cone PowerPeru S.A.) and Compañía Eléctrica Cono Sur S.A.(“Subcontractors”).  Subcontractorsperformed several obligations on behalf of Generandes Peru S.A., whichcompensated them for their services.

 

SUNAT’sposition is that: (i) Generandes Peru S.A. and the subcontractors are“holding companies” and cannot afford to perform the contracted services; (ii)Edegel did not exhibit documents showing that Endesa Chile and Entergy Co.,shareholders of Subcontractors, were hired by them and therefore, SUNAT doesnot accept the documents showed by Edegel and issued by Endesa Chile andEntergy Co.; and (iii) administration and development of the Yanango and ChimayProjects were performed by Edegel and not by third parties.

 

121

----

 

SUNATcontends that (i) Edegel received assistance services from its executives anddirectors and from Endesa Chile and Entergy Co. for free, and (ii) Edegel paidGenerandes Peru S.A. for a service the latter did not perform.  Even though SUNAT admits the projects tookplace, it concludes that there is no connection between payment made toGenerandes Peru S.A. and Edegel’s taxable income.

 

Edegelhas filed an objection to SUNAT’s tax assessment and has refuted SUNAT’sarguments and presented new evidence in the case.  Edegel’s legal advisors believe the TribunalFiscal (Tax Court) should dismiss SUNAT’s arguments and make a new examination.

 

**DividendPolicy**

 

As required by the Chilean Companies Act, unless otherwisedecided by unanimous vote of its issued Shares eligible to vote, Endesa Chilemust distribute a cash dividend in an amount equal to at least 30% of EndesaChile’s consolidated net income for each year (on a Chilean GAAP basis), unlessand except to the extent Endesa Chile has carried forward losses.  Subject to this requirement, Endesa Chile’sdividend policy is proposed to the shareholders at the annual regularshareholders’ meeting of Endesa Chile, as is the policy the board of directorsintends to follow with respect to the payment of dividends for that year.  At such meeting, shareholders consider and,if in order, approve the final dividend proposed by the board of directors inrespect of the prior year’s results.

 

In each year since 1990, Endesa Chile has declared asdividends 100% of its net income. However, at the annual regular shareholders meeting held on April 2001,the board of directors’ recommendation to change Endesa Chile’s dividend policyto provide for dividends that amount to 30% of the net income for 2000 wasapproved.  The board of directorsrecommended this change because much of the net income for 2000 did notrepresent recurring profits and the retained earnings would reinforce theCompany’s financial position and provide more funds for future projects.  At the annual regular shareholders’ meetingheld in March 2004 the dividend policy to provide for dividends an amount to30% of the net income for 2003 was approved.

 

At its February 28, 2005 ordinary meeting, the Company’sboard of directors agreed to modify the dividend policy which had beenpresented at the Company’s last ordinary shareholders’ meeting on March 26,2004.  At the April 8, 2005 annualordinary shareholders’ meeting, the board proposed, and the shareholdersapproved, a change in the dividend policy to provide for the payment of adividend equivalent to 50% of the annual net income of the fiscal year endedDecember 31, 2004.  This modificationimplies a 20% increase in the proportion of earnings distributed, from 30% to50%.

 

At its February 28, 2006 ordinary meeting, the Company’sboard of directors agreed, in compliance with the dividend policy for 2005, topropose at the annual ordinary shareholders’ meeting to be held on March 21,2006, the distribution of a final dividend of Ch$ 5.82 (five Chilean pesosand eighty-two cents) per common share. If approved, this dividend will be paid on March 30, 2006.

 

Considerations that are relevant to a determination by theboard of directors to propose a dividend include current and projectedoperating results, any applicable restrictions in Endesa Chile’s creditagreements and any other relevant factors. Shareholder approval of a proposed dividend is typically made subject tothe board’s ability to change the amount and timing of the dividend ifcircumstances relating to any of the foregoing considerations change subsequentto such shareholder approval.  Inaddition, because certain of the operations of Endesa Chile are conductedthrough subsidiaries, Endesa Chile’s ability to pay dividends depends, in part,on its receipt of dividends from such subsidiaries.  Currently, there are no restrictions on theability of Endesa Chile or any of its subsidiaries to pay dividends, other thancustomary legal restrictions limiting the amount of dividends to net income andretained earnings and except for the following: Endesa Chile is prohibited under its November 5, 2004 credit agreementfrom paying dividends if a default or event of default exists or would existafter giving effect to such payment; its subsidiary Pangue may not pay dividendsunless it complies with certain financial covenants relating to leverage anddebt service coverage ratios; Edegel may not pay dividends in the case ofdefault of certain loans; Endesa Costanera is prohibited from (i) payingdividends and intercompany interest, (ii) undertaking capital reductions, and(iii) repaying debt while certain debt is outstanding; and Betania isprohibited from (i) paying dividends in the case of default of certain loans,(ii) repaying intercompany debt unless it raises additional funds from the saleof assets or the capital reduction of its subsidiary Emgesa, and (iii) payingintercompany interest if any scheduled payment of the syndicated loan is dueand not paid.  

 

122

----

 

The Company pays dividends to shareholders of record as offive business days before the payment date. Holders of ADSs on the applicable record dates will be entitled toparticipate in all future dividends.

 

**Dividends**

** **

The table below sets forth, for each of the years indicated,the per share amounts of dividends distributed by the Company and the amount ofdividends distributed per 30 Shares (one ADS represents 30 Shares) in U.S.dollars.  See “Item 10. AdditionalInformation— D. Exchange Controls.”

 

123

----

 
| ** ** | ** ** | **Dividends Distributed (1)** | ** ** |
|------------|------------|-----------------------------------------|------------|
| **Year**   | ** ** | **Ch$ per Share (2)**    | ** ** | **Ch$ per Share (3)** | ** ** | **U.S.$ per 30 Shares  (ADS) (4)** | ** ** |
| 1997       |       | 11.74800                                |       | 15.12928 |   | 0.886 |   |
| 1998       |       | 2.06200                                 |       | 2.50067 |   | 0.146 |   |
| 1999       |       | —                                  |       | — |   | — |   |
| 2000       |       | 0.96000                                 |       | 1.08597 |   | 0.064 |   |
| 2001       |       | 0.94000                                 |       | 1.05487 |   | 0.062 |   |
| 2002       |       | —                                  |       | — |   | — |   |
| 2003       |       | 2.30000                                 |       | 2.44496 |   | 0.143 |   |
| 2004       |       | 4.13000                                 |       | 4.28694 |   | 0.251 |   |
| 2005(5)    |       | 5.82000                                 |       | 5.82000 |   | 0.341 |   |

 

----

(1)   This chart details dividends payable in any givenyear, not necessarily paid that same year, and do not reflect reduction for anyapplicable Chilean withholding taxes.

 

(2)   Amounts shown are in historical Chilean pesos.

 

(3)   Amounts shown are expressed in constant Chilean pesosas of December 31, 2005.

 

(4)   The U.S. dollar per ADS amount has been calculated byapplying the exchange rate of Ch$ 512.5 = U.S.$ 1.00, theObserved Exchange Rate prevailing on December 31, 2005, to the constantChilean peso amount.

 

(5)   To be proposed at the Annual Shareholders’ Meeting of EndesaChile, to be held on March 21, 2006.

 

**B.**    SignificantChanges.

 

None.

 

**Item 9.**    TheOffer and Listing

 

**A.**    Offerand listing details.

 

**Market Price andVolume Information**

 

EndesaChile has a total of 8,201,754,580 shares that are traded in Chile, the UnitedStates and Spain.  Transactions in Chiletake place on three exchanges: the Santiago Stock Exchange, the ElectronicStock Exchange and the Valparaíso Stock Exchange.  Endesa Chile conducted a preemptive rightsoffering and United States offering of ADSs in 1994 (the “1994 Offerings”).  Since the conclusion of the offerings in1994, the ADSs (each ADS representing 30 shares) have been traded in the UnitedStates on the New York Stock Exchange under the symbol EOC.  The ADSs are evidenced by American DepositaryReceipts, ADRs.  The ADRs are outstandingunder a Deposit Agreement dated as of August 3, 1994 among Endesa Chile,Citibank N.A. as depositary, and the holders from time to time of ADRs issuedthereunder.  An ADR may represent anynumber of ADSs.  Only persons in whosenames ADRs are registered on the books of the depositary are treated by thedepositary as owners of ADRs.

 

EndesaChile’s outstanding notes are not listed on any exchange.  The notes are traded primarily in theover-the-counter market in the United States.

 

During2005, volume traded on the Santiago stock exchange ascended to 859,476,150shares, equivalent to Ch$ 600.19 billion. The table below shows, for the periods indicated, annual quarterly, highand low closing prices in Chilean pesos for the Shares on the Santiago StockExchange and the annual, quarterly high and low closing prices of the ADSs inU.S. dollars as reported by the New York Stock Exchange.  As of December 31, 2005, ADRs evidencing13,698,490 shares were outstanding (equivalent to 410,954,700 shares or 5.01%of the total number of issued shares). It is not practicable for the Company to determine the proportion ofADRs beneficially owned by US persons. The stock closed at U.S.$ 30.62 on the last day of trading in theNew York Stock Exchange in 2005.

 

124

----

 
| ** **                                | ** ** | **Santiago Stock  Exchange (1)(2)** | ** ** | **NYSE (1)**           | ** ** |
|-------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **Ch$ per Share**                   | ** ** | **U.S.$ per ADS** | ** ** |
| **Most Recent Six Months** | ** ** | **High**                                      | ** ** | **Low**                     | ** ** | **High** | ** ** | **Low** | ** ** |
| February 2006                             |       | 565.00                                        |       | 511.00                      |       | 32.07 |   | 29.40 |   |
| January 2006                              |       | 555.70                                        |       | 520.00                      |       | 32.19 |   | 29.16 |   |
|                                      |       |                                          |       |                        |       |   |   |   |   |
| 2005 Annual                               |       |                                          |       |                        |       |   |   |   |   |
| lst Quarter                               |       | 393.00                                        |       | 313.50                      |       | 20.29 |   | 16.16 |   |
| 2nd Quarter                               |       | 505.00                                        |       | 428.00                      |       | 25.85 |   | 19.50 |   |
| 3rd Quarter                               |       | 523.00                                        |       | 465.10                      |       | 29.87 |   | 24.10 |   |
| 4th Quarter                               |       | 561.00                                        |       | 512.00                      |       | 32.50 |   | 28.53 |   |
|                                      |       |                                          |       |                        |       |   |   |   |   |
| 2004 Annual                               |       | 347.50                                        |       | 225.00                      |       | 18.66 |   | 11.50 |   |
| lst Quarter                               |       | 268.01                                        |       | 225.00                      |       | 13.80 |   | 11.52 |   |
| 2nd Quarter                               |       | 279.00                                        |       | 248.00                      |       | 13.71 |   | 11.50 |   |
| 3rd Quarter                               |       | 328.00                                        |       | 259.00                      |       | 16.33 |   | 12.20 |   |
| 4th Quarter                               |       | 347.50                                        |       | 311.00                      |       | 18.66 |   | 15.27 |   |
|                                      |       |                                          |       |                        |       |   |   |   |   |
| 2003 Annual                               |       | 253.00                                        |       | 172.00                      |       | 12.02 |   | 7.02 |   |
| 1st Quarter                               |       | 189.01                                        |       | 172.00                      |       | 8.10 |   | 7.02 |   |
| 2nd Quarter                               |       | 224.50                                        |       | 172.00                      |       | 9.54 |   | 7.10 |   |
| 3rd Quarter                               |       | 238.00                                        |       | 208.50                      |       | 10.80 |   | 8.90 |   |
| 4th Quarter                               |       | 253.00                                        |       | 222.00                      |       | 12.02 |   | 10.63 |   |
|                                      |       |                                          |       |                        |       |   |   |   |   |
| *2002 Annual*                             |       | 236.00                                        |       | 152.50                      |       | 10.73 |   | 6.05 |   |
|                                      |       |                                          |       |                        |       |   |   |   |   |
| *2001 Annual*                             |       | 254.00                                        |       | 190.99                      |       | 12.22 |   | 7.96 |   |

 

----

(1)   Sources: SantiagoStock Exchange, Official Quotation Bulletin, NYSE.

 

(2)   Chilean pesos perShare reflected nominal price at trade date.

 

**B.**    Planof Distribution

 

NotApplicable.

 

**C.**    Markets

 

InChile, the Company’s stock is traded on three exchanges.  The largest exchange in the country, theSantiago Stock Exchange, was established in 1893 as a private company.  Its equity consists of 48 shares held by 46stockholders as of the date of this filing. As of December 31, 2005, 245 companies had shares listed on the SantiagoStock Exchange.  For the year ended 2005,the Santiago Stock Exchange accounted for 84% of Endesa Chile’s total equitytraded in Chile.  In addition,approximately 15% of Endesa Chile’s equity trading was conducted on theElectronic Exchange, an electronic trading market that was created by banks andnonmember brokerage houses, and 1% was traded on the Valparaíso Exchange.

 

Equities,closed-end funds, fixed-income securities, short-term and money marketsecurities, gold and U.S.$ are traded on the Santiago Stock Exchange.  In 1991, the Santiago Stock Exchangeinitiated a futures market with two instruments, U.S. dollar futures andSelective Shares Price Index, or IPSA, futures. Securities are traded primarily through an open voice auction system, afirm offers system or the daily auction. Trading through the open voice system occurs on each business day in twosessions, from 11:00 a.m. to 11:30 a.m. and from 4:00 p.m. to 4:30 p.m.,Santiago time, which varies from New York City time depending on theseason.  The Santiago Stock Exchange hasan electronic trading system called *Telepregón*, whichoperates continuously for high volumes from 9:30 a.m. to 5:30 p.m. on eachbusiness day.  On days in which auctionsare scheduled, there are three times available for such auctions, 11:30 a.m.,1:00 p.m. and 3:30 p.m.

 

125

----

 

Thereare two share price indices on the Santiago Stock Exchange: the General SharePrice Index, or IGPA, and the IPSA.  TheIGPA is calculated using the prices of over 160 issues and is broken into fivemain sectors: banks and finance; farming and forest products; mining; industry;and miscellaneous.  The IPSA iscalculated using the prices of the 40 most actively traded shares.  The shares included in the IPSA are weightedaccording to the value of the shares traded. As of December 31, 2005, Endesa Chile was included in the IPSA.

 

InSpain, shares of Endesa Chile were first listed and began trading on the *Bolsa de Valores Latinoamericanos de la Bolsa de Madrid*, orLatibex, as of December 17, 2001.  Onetrading unit is the equivalent of 30 common shares (the same unit conversion of30:1 as an ADS) and the trading ticker symbol is “XEOC.”  Trading of our shares in the Latibex during2005 amounted to 970,060 units, which in turn was the equivalent of € 18.57million.  The stock closed at € 26.00on the last day of trading in Latibex in 2005.

 

**D.**    Sellingshareholders.

 

Notapplicable.

 

**E.**     Dilution.

 

Notapplicable.

 

**F.**     Expenseof the issue.

 

Notapplicable.

 

**Item10.**          Additional Information

 

**A.**    Sharecapital.

 

Includedbelow in Section B of this item.

 

**B.**    Memorandumand Articles of Association.

 

**Description ofShare Capital**

 

Setforth below is certain information concerning our share capital and a briefsummary of certain significant provisions of our by-laws and Chilean law.

 

**General**

 

Shareholders’rights in Chilean companies are governed by a company’s by-laws, whicheffectively serve the same purpose as the articles or certificate ofincorporation and the by-laws of a company incorporated in the United States,and by the *Ley de Sociedades Anónimas No. 18,046* orthe Chilean Companies Act.  In addition,DL-3500, which permits the investment by pension funds in stock of qualifiedcompanies, indirectly affects corporate governance and prescribes certainrights of shareholders.  In accordancewith the Chilean Companies Act, legal actions by shareholders against usenforcing their rights as shareholders must be brought in Chile in arbitrationproceedings or at the option of the plaintiff before the ordinary courts ofChile.

 

TheChilean securities markets are principally regulated by the *Superintendencia de Valores y Seguros*, the Superintendencyof Securities and Insurance, or the SVS, under the *Ley deMercado de Valores No. 18045*, or the Securities Market Law, and theChilean Companies Act.  These two lawsprovide for disclosure requirements, restrictions on insider trading and pricemanipulation, and protection of minority investors.  The Securities Market Law sets forthrequirements for public offerings, stock exchanges and brokers, and outlinesdisclosure requirements for companies that issue publicly offeredsecurities.  The Chilean Companies Actclarifies rules establishing publicly held limited liability companies whileeliminating government supervision of private companies.  On December 20, 2000, Law 19,705 was enacted,introducing important amendments to the Chilean Companies Act and theSecurities Market Law.  Among otherthings, it provides a new definition for publicly held companies and new rulesregarding change of control, tender offers, transactions with directors,qualified majorities, share repurchase, director’s committee, stock options andderivative actions.  Publicly heldlimited liability companies are those with 500 or

 

126

----

 

more shareholders, or companiesin which 100 or more shareholders own at least 10% of the subscribed capital,excluding those whose individual holdings exceed such percentage, and all othercompanies which are voluntarily registered with the SVS, regardless of thenumber of their shareholders.  EndesaChile is a publicly held limited liability company.

 

**ReportingRequirements Regarding Acquisition or Sale of Shares**

 

UnderArticle 12 of the Securities Market Law and Section II Circular 585 of the SVS,certain information regarding transactions in shares of publicly held limitedliability companies must be reported to the SVS and the Chilean stockexchanges.  Since the ADSs are deemed torepresent the shares of common stock underlying the ADRs, transactions in ADRswill be subject to these reporting requirements and those established inCircular 1,375 of the SVS.  The followingtransactions must be reported:

 

•      any direct orindirect acquisition or sale of shares made by a holder that owns directly orindirectly, 10% or more of a publicly held limited liability company’ssubscribed capital;

 

•      any direct orindirect acquisition or sale of shares made by a holder that, due to anacquisition of shares of such publicly held company, results in the holderacquiring directly or indirectly of 10% or more of a publicly held company’ssubscribed capital; and

 

•      any direct orindirect acquisition or sale of shares in any amount, made by a director,receiver, principal executive, general manager or manager of a publicly heldcompany.

 

Inaddition, persons who enter into the above-mentioned transactions must informto the SVS and the Chilean stock exchanges if such transactions are enteredinto with the intention of obtaining control of the Company.

 

UnderArticle 54 of the Securities Market Law and *Norma de Carácter General*No. 104 enacted by the SVS on January 5, 2001, any person who directly orindirectly intends to take control of a publicly held company must disclosethis intent to the market at least 10 business days in advance of the change ofcontrol and, in any event, as soon as the negotiations for the change ofcontrol have started.  If the change ofcontrol shall occur by means of a tender offer, the new provisions on tenderoffers will apply.

 

Law19,705 introduces a new Title to the Securities Market Law, establishing acomprehensive regulation on tender offers. The law defines a tender offer as the offer to purchase shares ofcorporations which publicly offer their shares or securities convertibles intoshares and which offer is made to shareholders to purchase their shares inconditions which allow the bidder to reach a certain percentage of ownership ofthe corporation within a fixed period of time. The new provisions apply to both voluntary and mandatory tender offers.

 

**Register**

 

EndesaChile is registered with the SVS and its entry number is 0114.

 

**Corporate Objectand Purpose**

 

Article4 of our by-laws state that our corporate objective and purpose is, among otherthings, to exploit the production, transportation, distribution and supply ofelectric power, as well as to provide engineering consultancy services,directly or through other companies, in Chile and abroad.

 

**Board of Directors**

 

Ourboard of directors is made up of nine members. Members of the board are appointed by the general meeting ofshareholders and are elected for a period of three years at the end of whichthey will be re-elected or replaced.

 

The ninedirectors elected at the shareholders’ meeting are those nine individualnominees who receive the most votes. Each shareholder may vote all of his shares in favor of one nominee ormay apportion his shares among any number of nominees.

 

127

----

 

Thecompensation of the directors is set annually by the general meeting ofshareholders.

 

Agreementsentered into by Endesa Chile in which one or more directors have an interest oract as the representative of another person have to be known to, and approvedpreviously by, the board and have to be consistent with usually prevailingmarket conditions.  The resolutions takenby the board to this effect have to be submitted to the next shareholders’meeting by the Chairman, and have to be listed in the notice of that meeting asa matter to be addressed at that meeting.

 

Allagreements between Endesa Chile and its majority shareholders, its directors orexecutives, or related parties, need to be approved by a two-thirds majority ofthe board and must be recorded in the minutes of the board of directormeetings.

 

**Certain Powers ofthe Board of Directors**

 

Ourby-laws do not contain provisions relating to:

 

•      the directors’power, in the absence of an independent quorum, to vote compensation tothemselves or any members of their body;

 

•      borrowingpowers exercisable by the directors and how such borrowing powers can bevaried;

 

•      retirement ornon-retirement of directors under an age limit requirement; or

 

•      number ofshares, if any, required for directors’ qualification.

 

**Certain ProvisionsRegarding Shareholder Rights**

 

As ofthe date of the filing of this annual report, Endesa Chile’s capital iscomprised of only one class of shares, all of which are ordinary shares andhave the same rights.

 

Ourby-laws do not contain any provisions relating to:

 

•      redemptionprovisions;

 

•      sinking funds;or

 

•      liability tofurther capital calls by the Company.

 

UnderChilean law, the rights of holders of stock may only be changed by an amendmentto the by-laws of the company that complies with the requirements explainedbelow under “Shareholders’ Meetings and Voting Rights”.

 

**Capitalization**

 

UnderChilean law, the shareholders of a company, acting at a special shareholders’meeting, have the power to authorize an increase in its capital.  When an investor subscribes for shares, theshares are officially issued and registered in his name, and the subscriber istreated as a shareholder for all purposes except receipt of dividends and forreturn of capital in the event that the shares have been subscribed but notpaid for.  The subscriber becomeseligible to receive dividends once he has paid for the shares, or, if he haspaid for only a portion of such shares, such subscriber is entitled to receivea corresponding *pro rata* portion of the dividendsdeclared with respect to such shares unless the company’s by-laws provideotherwise.  If a subscriber does notfully pay for shares for which he has subscribed on or prior to the date agreedupon for payment, the company is entitled to auction the shares on the stockexchange where such shares are traded and has a cause of action against thesubscriber for the difference, if any, between the subscription price and theprice received at auction.  However,until such shares are sold at auction, the subscriber continues to exercise allthe rights of a shareholder, except the right to receive dividends and returnof capital.  Authorized shares, andissued shares for which full payment has not been made within the period fixedby the special shareholders’ meeting at which their subscription wasauthorized, which in no case may exceed three years from the date of suchmeeting, are canceled and are no longer available for issuance.

 

128

----

 

As ofthe date of this annual report, the capital subscribed for and fully paid isCh$ 1,115,200,845,356 (this sum corresponds to the subscribed and paidcapital on December 31, 2005) through 8,201,754,580 shares.

 

**Preemptive Rightsand Increases of Share Capital**

 

TheChilean Companies Act requires Chilean companies to grant shareholders thepreemptive right to purchase a sufficient number of shares to maintain theirexisting ownership percentage of such company whenever such company issues newshares.

 

UnderChilean law, preemptive rights are exercisable or freely transferable byshareholders during the 30-day period following the granting of suchrights.  During such 30-day period, andfor an additional 30-day period, publicly held limited liability companies arenot permitted to offer any unsubscribed shares to third parties on terms whichare more favorable than those offered to their shareholders.  At the end of such additional 30-day period,a Chilean publicly held limited liability company is authorized to sellnon-subscribed shares to third parties on any terms, provided they are sold onone of the Chilean stock exchanges.

 

**Shareholders’Meetings and Voting Rights**

 

Amodification of Articles 1bis, 5bis, 16bis, 20bis, 27bis, 28bis, 32bis, 34bis,35bis and 36bis of the by-laws requires the affirmative vote of 75% of theissued voting shares.

 

Aregular annual meeting of our shareholders is held within the first four monthsfollowing the end of our fiscal year. The last regular annual meeting was held on April 8, 2005.  Special meetings may be called by the boardof directors when deemed appropriate or when requested by shareholdersrepresenting at least 10% of the issued voting shares or by the SVS.  To convene a special meeting, or a regularannual meeting, notice must be given by three publications in a prescribedmanner in a newspaper of our corporate domicile.  The newspaper designated by our shareholdersis *El Mercurio de Santiago*.  The first notice must be published not lessthan 15 days nor more than 20 days in advance of the scheduled meeting.  Notice must also be mailed to eachshareholder and given to the SVS and the Chilean stock exchanges.  The last special meeting of shareholders washeld on April 8, 2005.

 

UnderChilean law, a quorum for a shareholders’ meeting is established by thepresence, in person or by proxy, of shareholders representing at least amajority of the issued voting shares of a company.  If a quorum is not present at the firstmeeting, a reconvened meeting can take place at which the shareholders presentare deemed to constitute a quorum regardless of the percentage of the sharesrepresented.  The second meeting musttake place within 45 days following the scheduled date for the first meeting.  Shareholders’ meetings adopt resolutions bythe affirmative vote of an absolute majority of those shares present, orrepresented, at the meeting. Additionally, a shareholders’ meeting is called for the purpose ofconsidering:

 

•      atransformation of the company into a form other than a sociedad anónima abierta(a publicly held limited liability company) under the Chilean Companies Act, amerger or division of the company;

 

•      an amendment tothe term of duration or early dissolution;

 

•      a change in thecorporation’s domicile;

 

•      a decrease ofcorporate capital;

 

•      approval ofcapital contributions in kind and assessment of assets that do not consist ofmoney;

 

•      modification ofthe authority reserved to shareholders or limitations on the board ofdirectors;

 

•      reduction inthe number of members of the board of directors;

 

•      disposition of50% or more of the assets of the corporation, whether it includes dispositionof liabilities or not, as well as the approval or the amendment of the businessplan which contemplates the disposition of assets for such amount;

 

•      the form of distributingcorporate benefits;

 

129

----

 

•      issue ofguarantees for third parties’ liabilities which exceed 50% of the assets, butif the third party is a subsidiary of the company, the approval of the board ofdirectors is sufficient;

 

•      the purchase ofthe corporation’s own shares; or

 

•      certainremedies for the nullification of the corporate by-laws.

 

Regardlessof the quorum present, the vote required for any of the above action is atwo-thirds majority of the issued voting shares.

 

By-lawamendments for the creation of a new class of shares, or an amendment to or anelimination of those classes of shares that already exist, must be approved bytwo-thirds of the outstanding shares of the affected series.

 

Chileanlaw does not require a publicly held Chilean company to provide itsshareholders the same level and type of information required by U.S. securitieslaws regarding the solicitation of proxies. However, shareholders are entitled to examine the books of the companywithin the 15-day period before the scheduled regular annual shareholders’meeting.  Under Chilean law, a notice ofa shareholders meeting listing matters to be addressed at the meeting must bemailed at least 15 days prior to the date of such meeting, and, in cases of aregular annual meeting, shareholders must be sent an annual report of thecompany’s activities which includes audited financial statements.  Limitations on the distribution of annualreports are established for the SVS in Circular No. 1108.

 

TheChilean Companies Act provides that, upon the request by shareholdersrepresenting 10% or more of the issued voting shares, a Chilean company’sannual report must include, in addition to the materials provided by the boardof directors to shareholders, such shareholders’ comments and proposals inrelation to the company’s affairs. Similarly, the Chilean Companies Act provides that whenever the board ofdirectors of a publicly held company convenes a regular meeting of shareholdersand solicits proxies for the meeting, or circulates information supporting itsdecisions or other similar material, it is obligated to include the pertinentcomments and proposals that may have been made by shareholders owning 10% ormore of the company’s voting shares who request that such comments andproposals be so included.

 

Onlyshareholders registered as such with Endesa Chile at least five business daysprior to the date of a meeting are entitled to attend and vote theirshares.  A shareholder may appoint anotherindividual, who need not be a shareholder as his proxy to attend and vote onhis behalf.  Proxies for suchrepresentation shall be given in writing for all the shares held by the owner.  Every shareholder entitled to attend and voteat a shareholders’ meeting shall have one vote for every share subscribed.

 

Eachshare of common stock entitles the registered holder thereof to one vote inperson or by proxy at any meeting of shareholders of the company.  There are no limitations on the right ofnonresidents or foreigners to hold or vote shares of common stock imposed byChilean law or the company’s by-laws. However, the registered holder of the shares of common stock representedby ADSs and evidenced by outstanding ADRs is the custodian of the Depositary,currently Citibank N.A. (Chile), or any successor thereto.  Accordingly, holders of ADRs are not entitleddirectly to receive notice of meetings of shareholders or directly to vote theunderlying shares of common stock represented by ADSs and evidenced by theADRs.  The Deposit Agreement containsprovisions pursuant to which the Depositary has agreed to solicit instructionsfrom registered holders of ADRs as to the exercise of the voting rightspertaining to the shares of common stock represented by the ADSs and evidencedby such ADRs.  Subject to compliance withthe requirements of the Deposit Agreement and receipt of such instructions, theDepositary has agreed to endeavor insofar as practicable and permitted underChilean law and the provisions of the by-laws to vote or cause to be voted (orgrant discretionary proxy to the Chairman of the Board of directors of thecompany or to a person designated by the Chairman of the Board of directors ofthe company to vote) the shares of common stock represented by the ADSsevidenced by such ADRs in accordance with any such instruction.  The Depositary shall not itself exercise anyvoting discretion over any shares of common stock underlying ADSs.  If no voting instructions are received by theDepositary from a holder of ADRs with respect to the shares of common stockrepresented by the ADSs and evidenced by such ADRs on or before the dateestablished by the Depositary for such purpose, the shares of common stockrepresented by the ADSs, subject to limitations set forth in the DepositAgreement, may be voted in the manner directed by the Chairman of the Board ofthe company.

 

130

----

 

**Dividends andLiquidation Rights**

** **

Inaccordance with Chilean law, we are required to pay cash dividends equal to atleast 30% of annual audited net income, calculated in accordance with ChileanGAAP.  If there is no net income in agiven year, we may, but are not legally obligated to, distribute dividends outof retained earnings.

 

Anydividend in excess of 30% of net income may be paid, at the election of theshareholder, in cash, in Endesa Chile’s shares or in shares of publicly heldcorporations held by Endesa Chile. Shareholders who do not expressly elect to receive a dividend other thanin cash are legally presumed to have decided to receive the dividend in cash.

 

Dividendswhich are declared but not paid within the appropriate time period set forth inthe Chilean Companies Act—as to minimum dividends, 30 days after declaration;as to additional dividends, the date set for payment at the time ofdeclaration, are adjusted to reflect the change in the value of UF, aChilean inflation adjusted currency, from the date set for payment to the datesuch dividends are actually paid.  Suchdividends also accrue interest at the then prevailing ratefor UF-denominated deposits during such period.  The right to receive a dividend lapses if itis not claimed within five years from the date such dividend is payable.

 

In theevent of a liquidation of Endesa Chile, the holders of shares would participatein the assets available in proportion to the number of paid-in shares held bythem, after payment of all creditors.

 

**Approval ofFinancial Statements**

** **

Theboard of directors is required to submit Endesa Chile financial statements tothe shareholders annually for their approval. If the shareholders by a vote of a majority of shares present (in personor by proxy) at the shareholders’ meeting reject the financial statements, theboard of directors must submit new financial statements no later than 60 daysfrom the date of such meeting.  If theshareholders reject the new financial statements, the entire board of directorsis deemed removed from office and a new board is elected at the samemeeting.  Directors who individuallyapproved such financial statements are disqualified for reelection for thefollowing period.  Our shareholders havenever rejected the financial statements presented by the board of directors.

 

**Change of Control**

** **

Ourby-laws do not contain any provisions that would delay, defer or prevent achange in control of Endesa Chile.  Undernew Article 54 and *Norma de Carácter General*No. 104 enacted by the SVS on January 5, 2001, any person who directly orindirectly intends to take control of a company and who makes a public offerfor its shares must disclose their intent to the market at least 10 businessdays in advance of the change of control and, in any event, as soon as thenegotiations for the change of control have started.  If the change of control shall occur by meansof a tender offer, the new provisions on tender offers will apply.

 

**Acquisition ofShares**

** **

Thereare no provisions in our by-laws that discriminate against any existing orprospective holder of shares as a result of such shareholder owning asubstantial number of shares.  However,no person may directly or indirectly own more than 65% of the outstandingshares of our stock.  The foregoingrestriction does not apply to the depositary as record owner of sharesrepresented by ADRs, but it does apply to each beneficial ADS holder.  Additionally, our by-laws prohibit anyshareholder from exercising voting power with respect to more than 65% of thecommon stock owned by such shareholder or on behalf of others representing morethan 65% of the outstanding issued voting shares.

 

**Right ofDissenting Shareholders to Tender Their Shares**

 

TheChilean Companies Act provides that upon the adoption of any of the resolutionsenumerated below at a meeting of shareholders, dissenting shareholders acquirethe right to withdraw from the company and to compel the company to repurchasetheir shares, subject to the fulfillment of certain terms and conditions.  In order to exercise such rights, holders ofADRs must first withdraw the shares represented by their ADRs pursuant to theterms of the deposit agreement.

 

131

----

 

“Dissenting”shareholders are defined as those who vote against a resolution that results inthe withdrawal right, or who if absent from such meeting, state in writingtheir opposition to the respective resolution, within the 30 days following theshareholders’ meeting.  The price paid toa dissenting shareholder of a publicly held company, the shares of which arequoted and actively traded on one of the Chilean stock exchanges, is thegreatest among (i) the weighted average of the sales prices for the shares asreported on the Chilean stock exchanges on which the shares are quoted for thetwo-month period preceding the shareholders’ meeting giving rise to thewithdrawal right, and (ii) the market price resulting from the average price oftransactions on such day.  If, because ofthe volume, frequency, number and diversity of the buyers and sellers, the SVSdetermines that the shares are not actively traded on a stock exchange, theprice paid to the dissenting shareholder shall be the book value.  Book value for this purpose shall equal paidcapital plus reserves and profits, less losses, divided by the total number ofsubscribed shares, whether entirely or partially paid.  For the purpose of making this calculation,the last annual balance sheet is used, as adjusted to reflect inflation up tothe date of the shareholders’ meeting which gave rise to the withdrawal right.

 

Theresolutions that result in a shareholder’s right to withdraw include, amongothers, the following:

 

•      thetransformation of the company into an entity which is not a sociedad anónimaabierta governed by Chilean Companies Act;

 

•      the merger ofthe company with another company;

 

•      disposition of50% or more of the assets of the corporation, whether it includes dispositionof liabilities or not, as well as any business plan which contemplates thedisposition of assets for an amount greater than such percentage;

 

•      issue ofguarantees for third parties’ liabilities which exceed 50% of the assets, butif the third party is a subsidiary of the company, the approval of the board ofdirectors is sufficient;

 

•      the creation ofpreferential rights for a class of shares or an amendment to the existingones.  In this case the right to withdrawonly accrues to the dissenting shareholders of the class or classes of sharesadversely affected;

 

•      certainremedies for the nullification of the corporate by-laws; and

 

•      such othercauses as may be established by the law and by the company’s by-laws.

 

**Investments byAFPs**

 

TitleXII of DL-3500 permits *Administradoras de Fondosy Pensiones*, or AFPs to invest their fund assets in companies thatare subject to Title XII and, subject to greater restrictions, in othercompanies.  The determination of whichstocks may be purchased by AFPs is made by the Risk ClassificationCommittee.  The Risk ClassificationCommittee establishes investment guidelines and is empowered to approve ordisapprove those companies that are eligible for AFP investments.  Endesa Chile has been a Title XII Companysince 1987 and is approved by the Risk Classification Committee.

 

TitleXII companies are required to have by-laws that limit the ownership of anyshareholder to a specified maximum percentage, and that certain actions betaken only at a meeting of the shareholders and give the shareholders the rightto approve certain investment and financing policies.

 

**Registrations andTransfers**

 

Theshares are registered by Endesa Chile through an Administrative Agent named *Depósito Central de Valores S.A.*, *Depósito**de Valores*.  This entity is responsible for Endesa Chile’sshareholders registry as well.  In caseof jointly owned shares, an attorney-in-fact must be appointed to represent thejoint owners in dealing with Endesa Chile.

 

132

----

 

**Foreign InvestmentContract and Chapter XXVI**

 

Inconnection with our initial offering of ADSs in 1994, we entered into a foreigninvestment contract (the “Foreign Investment Contract”) with the Central Bankand the Depositary, pursuant to Article 47 of the Central Bank Act and ChapterXXVI of the Compendium of Foreign Exchange Regulations of the Central Bank (“ChapterXXVI”), which governed the issuance of ADSs by a Chilean company.  Pursuant to the Foreign Investment Contract,the foreign exchange for payments and distributions with respect to the ADSsmay be purchased in either the Formal Exchange Market or the Informal ExchangeMarket, but such payments must be necessarily remitted through the FormalExchange Market.  A new Compendium ofForeign Exchange Regulations in force since April 19, 2001 eliminated ChapterXXVI.  This Compendium was restated andhas been in force since March 1, 2002. As a result of the elimination of Chapter XXVI, there is no longerassured access to the Formal Exchange Market. However, because the Foreign Investment Contract was entered intopursuant to Chapter XXVI, the principles of Chapter XXVI still apply to itsterms.  Foreign investors who havepurchased their shares under a Foreign Investment Contract pursuant to ChapterXXVI continue to have access to the Formal Exchange Market for the purpose ofconverting Chilean pesos to U.S.$ and repatriating from Chile amounts received withrespect to the deposited shares of common stock or shares of common stockwithdrawn from deposit on surrender of ADRs (including amounts received as cashdividends and proceeds from the sale in Chile of the underlying shares ofcommon stock and any rights with respect thereto).  The Foreign Investment Contracts cannot bemodified or terminated without the consent of all parties, and thereforeforeign investors who have purchased their shares under a Foreign InvestmentContract will continue to have access to the Formal Exchange Market.  However, foreign investors who did notdeposit the shares of common stock into our ADS facility will not have thebenefits of our foreign investment contract with the Central Bank but insteadwill be subject to the normal foreign investment rules.

 

Thefollowing is a summary of certain provisions which were contained in ChapterXXVI and the Foreign Investment Contract, and which therefore remainrelevant.  This summary does not purportto be complete and is qualified in its entirety by reference to Chapter XXVIand the Foreign Investment Contract.

 

UnderChapter XXVI and the Foreign Investment Contract, the Central Bank agreed togrant to the Depositary, on behalf of ADR holders, and to any investor notresiding or domiciled in Chile who withdraws common stock upon delivery of ADRs(such shares of common stock being referred to herein as “Withdrawn Shares”)access to the Formal Exchange Market to convert Chilean pesos into U.S. dollars(and to remit such U.S. dollars outside of Chile), including amounts receivedas:

 

•      cash dividends;

 

•      proceeds fromthe sale in Chile of Withdrawn Shares subject to receipt by the Central Bank ofa certificate from the holder of the Withdrawn Shares (or from an institutionauthorized by the Central Bank) that such holder’s residence and domicile areoutside Chile and a certificate from a Chilean stock exchange (or from abrokerage or securities firm established in Chile) that such Withdrawn Shareswere sold on a Chilean stock exchange;

 

•      proceeds fromthe sale in Chile of rights to subscribe for additional shares of Common Stock;

 

•      proceeds fromthe liquidation, merger or consolidation of our company; and

 

•      otherdistributions, including without limitation those resulting from any recapitalization,as a result of holding shares of Common Stock represented by ADSs or WithdrawnShares.

 

Transfereesof Withdrawn Shares were not entitled to any of the foregoing rights underChapter XXVI.  Investors receivingWithdrawn Shares in exchange for ADRs had the right to redeposit such shares inexchange for ADRs, provided that certain conditions relating to redeposit weresatisfied.

 

ChapterXXVI provided that access to the Formal Exchange Market in connection withdividend payments was conditioned upon certification by us to the Central Bankthat a dividend payment has been made and any applicable tax has beenwithheld.  Chapter XXVI also providedthat the access to the Formal Exchange Market in connection with the sale ofWithdrawn Shares or distributions thereon was conditioned upon receipt by theCentral Bank of certification by the Depositary (or the Custodian on itsbehalf) that such Shares have been withdrawn in exchange

 

133

----

 

forADRs and receipt of a waiver of the benefit of the Foreign Investment Contractwith respect thereto until such Withdrawn Shares were redeposited.

 

TheForeign Investment Contract provides that a person who brings foreign currencyinto Chile to purchase shares of common stock with the benefit of the ForeignInvestment Contract must convert it into Chilean pesos on the same date and hasfive banking business days within which to invest in shares of common stock inorder to receive the benefits of the Foreign Investment Contract.  If such person decides within such period notto acquire shares of common stock, such person can access the Formal ExchangeMarket to reacquire U.S. dollars provided that the applicable request ispresented to the Central Bank within seven banking business days of the initialconversion into pesos.  Shares acquiredas described above may be deposited for ADRs and receive the benefits of theForeign Investment Contract, subject to receipt by the Central Bank of a certificatefrom the Depositary (or the Custodian on its behalf) that such deposit has beeneffected and that the related ADRs have been issued and receipt of adeclaration from the person making such deposit waiving the benefits of theForeign Investment Contract with respect to the deposited shares of commonstock.

 

Accessto the Formal Exchange Market under any of the circumstances described above isnot automatic.  Pursuant to Chapter XXVI,such access required approval of the Central Bank based on a request thereforepresented through a banking institution established in Chile.  The Foreign Investment Contract provides thatif the Central Bank has not acted on such request within seven banking days,the request will be deemed approved.

 

InNovember 1995, the Central Bank amended Chapter XXVI to regulate secondaryofferings of ADSs by companies that have previously entered into a ForeignInvestment Contract.  In accordance withthe new regulations, we entered into an amended Foreign Investment Contract inconnection with its offering of ADSs completed in February 1996 to comply withthe rules in effect on the date of Central Bank approval of the new issuance ofADSs.

 

OnNovember 16, 1999, the Central Bank issued new regulations which amendedChapter XXVI.  Among the amendments,Chapter XXVI required that foreign currency that entered Chile pursuant toChapter XXVI be converted into Chilean pesos in the Formal Exchange Market, andthe shares evidencing ADRs only be paid in Chilean pesos.  In addition, foreign currency required toremit the proceeds of the sale of the underlying shares be acquiredalternatively in the Formal or in the Informal Exchange Market, althoughremittance of such amounts necessarily was to be made through the FormalExchange Market (i.e., through a bank). On May 12, 2000, the rule that required that the invested capital remainin the country for at least one year before being repatriated was eliminated.

 

Undercurrent Chilean law, the Foreign Investment Contract cannot be changedunilaterally by the Central Bank.  It isnot certain, however, that additional Chilean restrictions applicable to theholders of ADRs, the disposition of underlying shares of Common Stock or therepatriation of the proceeds from such disposition could not be imposed in thefuture, nor can there be any assessment of the duration or impact of suchrestrictions if imposed.

 

**The Compendium andInternational Bond Issuances**

 

Chileanissuers may offer bonds internationally under Chapter XIV, as amended, of theCompendium of Foreign Exchange Regulations (the “Compendium”), issued by theCentral Bank.

 

Priorto September 17, 1998, foreign loans (including international bond offerings)granted to individuals or companies in Chile were subject to a mandatorydeposit (“*encaje*”) of an amount equal to 10%(reduced from a prior level of 30%) of the proceeds of the loan (or bondoffering) in a one-year, noninterest-bearing U.S. dollar account with theCentral Bank (or to payment of a charge to the Central Bank on the next workingday after the date of conversion of foreign currency into Chilean pesos in anamount equal to interest on such deposit at the rate of the twelve-month LIBORfor U.S. dollar deposits plus a market spread that currently approximates4%).  On September 17, 1998, the *encaje* deposit requirement was reduced to 0%, and on April19, 2001, the *encaje* was eliminated.  Despite this elimination, the Central Bankmay at any time reinstate the *encaje*.

 

**C.**    Materialcontracts.

 

**None.**

 

134

----

 

**D.**    Exchangecontrols.

 

TheCentral Bank is responsible for, among other things, monetary policies andexchange controls in Chile.

 

OnJanuary 23, 2002, the Chilean Central Bank approved a new Compendium of ForeignExchange Regulations that replaced the existing one.  The new rules are in effect since March 1,2002.

 

Withthese new rules, the Central Bank ends a process of gradual deregulation of theforeign exchange market.

 

Thisnew Compendium enhances the quality of the information gathered by the CentralBank with respect to monetary policies and exchange controls.  The Compendium incorporates the mainregulations that modified the Compendium of Foreign Exchange Regulations inApril 1991.  In other words, newcross-border investing and financing decisions will no longer be subject to anyrestrictions set forth in both Articles 42 and 49 of the Central Bank law suchas:

 

•      the priorCentral Bank authorization requirement for the entry of capital associated withforeign loans, investments, capital contributions, bonds and ADRs;

 

•      the priorCentral Bank authorization for capital remittances associated with returns ofcapital, dividends, and other benefits related to capital contributions,investments and prepayment of foreign loans;

 

•      the priorCentral Bank authorization for the return of capital, profits and otherbenefits associated with investments made by Chilean residents abroad;

 

•      the limitationsto the special prepayment and acceleration clauses contained in foreign loans;

 

•      therestrictions of minimum risk classification and the weighted duration for theissuance of bonds;

 

•      the limitationswith respect to the currencies in which external debt can be issued orcontracted;

 

•      therestrictions to the issue of ADRs; and

 

•      the reserverequirement on funds coming from abroad (which was already 0%).

 

**E.**     Taxation.

 

**Chilean TaxConsiderations**

 

Thefollowing discussion summarizes material Chilean income and withholding taxconsequences to beneficial owners arising from the receipt, the exercise and/orthe sale of ADS rights as well as from the purchase, ownership and dispositionof the shares and ADSs.  The summarywhich follows does not purport to be a comprehensive description of all of thetax considerations that may be relevant to a decision to purchase, own ordispose of shares or ADSs and does not purport to deal with the taxconsequences applicable to all categories of investors, some of which may besubject to special rules.  Holders ofshares and ADSs are advised to consult their own tax advisors concerning theChilean and other tax consequences of the ownership of shares or ADSs.

 

Thesummary that follows is based on Chilean law, as in effect on the date hereof,and is subject to any changes in these or other laws occurring after such date,possibly with retroactive effect.  UnderChilean law, provisions contained in statutes such as tax rates applicable toforeign investors, only another law may amend the computation of taxable incomefor Chilean purposes and the manner in which Chilean taxes are imposed andcollected.  In addition, the Chilean taxauthorities enact rulings and regulations of either general or specificapplication and interpret the provisions of Chilean tax law.  Chilean tax may not be assessed retroactivelyagainst taxpayers who act in good faith relying on such rulings, regulationsand interpretations, but Chilean tax authorities may change their rulings,regulations and interpretations prospectively. The discussion that follows is also based, in part, on representationsof the depositary, and assumes that each obligation in the deposit agreementand any related agreements will be performed in accordance with its terms.  There is no income tax treaty in forcebetween Chile and the United States.

 

135

----

 

Asused in this annual report, the term “foreign holder” means either

 

•      in the case ofan individual, a person who is not a resident in Chile; for purposes of Chileantaxation, an individual holder is resident in Chile if he or she has resided inChile for more than six months in one calendar year, or a total of more thansix months in two consecutive fiscal years; or

 

•      in the case ofa legal entity, an entity that is not organized under the laws of Chile, unlessthe shares or ADSs are assigned to a branch, agent, representative or permanentestablishment of such entity in Chile.

 

**Taxation of Sharesand ADSs**

 

*Taxation of CashDividends and Property Distributions*

* *

Cashdividends paid with respect to the shares or ADSs held by a foreign holder willbe subject to a 35% Chilean withholding tax, which is withheld and paid over bythe company.  A credit against theChilean withholding tax is available based on the level of corporate income taxactually paid by the company on the income to be distributed; however, thiscredit does not reduce the Chilean withholding tax on a one-for-one basisbecause it also increases the base on which the Chilean withholding tax isimposed.  In addition, if the companydistributes less than all of its distributable income, the credit for the Chileancorporate income tax paid by the company is proportionately reduced.  On September 28, 2001, the Chilean corporatetax rate was amended.  Until December 31,2001, the corporate tax rate was 15%.  Asof January 1, 2002, the corporate tax rate was increased to 16%.  As of January 1, 2003, it increased to 16.5%and as of January 1, 2004, the corporate tax rate increased to 17%.  The example below illustrates the effectiveChilean withholding tax burden on a cash dividend received by a foreign holder,assuming a Chilean withholding tax rate of 35%, an effective Chilean corporateincome tax rate of 17% and a distribution of 50% of the net income of thecompany distributable after payment of the Chilean corporate income tax:

 
| Company taxable income                                            |   | 100.0 |   |
|-------------------------------------------------------------------|--------|-------|--------|
| Chilean corporate income tax (17% of  Ch$100)                     |   | (17   | )      |
| Net distributable income                                          |   | 83    |   |
| Dividend distributed (50% of net  distributable income)           |   | 41.5  |   |
| Withholding tax (35% of the sum of Ch$41.5  dividend plus Ch$8.5) |   | (17.5 | )      |
| Credit for 50% of Chilean corporate income  tax                   |   | 8.5   |   |
| Net withholding tax                                               |   | (9    | )      |
| Net dividend received                                             |   | 32.5  |   |
| Effective dividend withholding rate                               |   | 21.69 | %      |

 

Ingeneral, the effective dividend Chilean withholding tax rate, after givingeffect to the credit for the Chilean corporate income tax paid by the company,can be computed using the following formula:

 
| Effective Dividend   | (Withholding tax  rate) – (Chilean corporate income tax rate) |   |
|----------------------|--------------------------------------------------------------------|--------|
| Withholding Tax Rate | 1 – (Chilean  corporate income tax rate)                      |   |

 

Dividendsgenerally are assumed to have been paid out of the Company’s oldest retainedprofits for purposes of determining the level of Chilean corporate income taxthat was paid by the Company.  Forinformation as to the retained earnings of the Company for tax purposes and thetax credit available on the distribution of such retained earnings, see Note 7to our consolidated financial statements.

 

UnderChilean income tax law, dividend distributions made in property are subject tothe same Chilean tax rules as cash dividends. Stock dividends are not subject to Chilean taxation.

 

*Taxation on Sale orExchange of Shares or ADSs*

* *

Gainsobtained by a foreign holder from the sale or exchange of ADSs, or ADRsevidencing ADSs, outside Chile will not be subject to Chilean taxation.

 

136

----

 

*Taxation on sharesacquired on or before April 19, 2001*

* *

Gainrecognized on a sale or exchange of shares (as distinguished from sales orexchanges of ADSs representing such shares) will be subject to both a 17% Chileanincome tax and the 35% Chilean withholding tax (the former being creditableagainst the latter) if either the foreign holder:

 

•      has held theshares for less than one year since exchanging ADSs for the shares; or

 

•      acquired anddisposed of the shares in the ordinary course of its business or as an habitualtrader of shares.

 

In allother cases, gain on the disposition of shares will be subject to a 17% Chileanincome tax but will not be subject to the 35% Chilean withholding tax.

 

*Taxation on shares acquiredafter April 19, 2001*

* *

OnNovember 7, 2001, the income tax law was amended in order to create a taxexemption on capital gains arising from the sale of shares of listed companiestraded in the stock markets.  Althoughthere are certain restrictions established in the amended income tax law, ingeneral terms, the amendment provides that in order to have access to thecapital gain exemption: (i) the shares must be of a public stock corporationwith a certain minimum level of trading in a stock exchange, (ii) the sale mustbe carried out in a Chilean stock exchange, or in another stock exchangeauthorized by the SVS, or in a tender offer subject to Chapter XXV of theChilean Securities Market Law, (iii) the shares which are being sold must havebeen acquired on a stock exchange, or in a tender offer subject to Chapter XXVof the Chilean Securities Market Law, or in an initial public offering (due tothe creation of a company or to a capital increase), or due to the exchange ofconvertible bonds, and (iv) the shares must have been acquired after April 19,2001.

 

Thetax basis of shares received in exchange for ADSs will be the acquisition valueof the shares.  The valuation procedureset forth in the deposit agreement, which values shares at the highest price atwhich they trade on the Santiago Stock Exchange on the date of the exchange,will determine the acquisition value for this purpose.  Consequently, the conversion of ADSs intoshares and the immediate sale of the shares for the value established under thedeposit agreement will not generate a capital gain subject to taxation inChile.

 

*Taxation of Rights andADS Rights*

* *

ForChilean tax purposes, the receipt of rights or ADS rights by a foreign holderof shares or ADSs pursuant to a rights offering is a nontaxable event.  In addition, there are no Chilean income taxconsequences to foreign holders upon the exercise or the lapse of the rights orthe ADS rights.  Any gain on the sale,exchange or transfer of the rights by a foreign holder is subject to a 35%Chilean withholding tax.

 

*Other Chilean Taxes*

* *

Thereare no gift, inheritance or succession taxes applicable to the ownership,transfer or disposition of ADSs by a foreign holder, but such taxes willgenerally apply to the transfer at death or by gift of the shares by a foreignholder.  There are no Chilean stamp,issue, registration or similar taxes or duties payable by holders of shares orADSs.

 

**United States TaxConsiderations**

 

Thefollowing discussion describes the material U.S. federal income tax consequencesof acquiring, owning and disposing of our ADSs or shares to a beneficial ownerthat is, for U.S. federal income tax purposes, (i) a citizen or resident of theUnited States, (ii) a corporation; or other entity taxable as a corporation;created or organized in or under the laws of the United States or of anypolitical subdivision thereof, or (iii) an estate or trust the income of whichis subject to United States federal income taxation regardless of itssource.  The discussion is based on thetax laws of the United States, including the Internal Revenue Code of 1986, asamended (the “Code”), final, temporary and proposed regulations, publishedrulings and court decisions, all as currently in effect or proposed, any ofwhich is subject to change at any time, possibly with retroactive effect.

 

137

----

 

Thisdiscussion deals only with our ADSs or shares held by you as capital assets asdefined in Section 1221 of the Code and does not address the tax treatment toyou, if you are a member of a class of holders subject to special treatmentunder U.S. federal income tax laws such as:

 

•      certainfinancial institutions;

 

•      a dealer insecurities or foreign currencies;

 

•      a trader insecurities that elects to use a mark-to-market method of accounting for yoursecurities holdings;

 

•      an insurancecompany;

 

•      a tax-exemptentity;

 

•      a personsubject to the alternative minimum tax;

 

•      partnerships orother entities classified as partnerships for U.S. federal income tax purposes;

 

•      a person whowill hold our ADSs or shares as part of a straddle, hedging transaction,conversion transaction or other integrated transaction;

 

•      a person thathas a principal place of business or “tax home” outside the United States, or aperson whose functional currency is not the U.S. dollar;

 

•      a person whoacquired our ADSs pursuant to the exercise of an employee stock option orotherwise as compensation; and

 

•      a person owningdirectly, indirectly or by attribution 10% or more of our capital stock.

 

Moreover,the effect of any applicable U.S. state or local tax laws as well as of anyforeign taxing jurisdiction is not discussed herein.

 

Ingeneral, if you hold ADSs, you will be treated as the holder of the underlyingshares represented by those ADSs for U.S. federal income tax purposes.  Accordingly, no gain or loss will berecognized if you exchange ADSs for the underlying shares represented by thoseADSs.

 

Unlessotherwise stated, this discussion assumes that we are not, and will not become,a passive foreign investment company (a “PFIC”) for U.S. federal income taxpurposes, as described more fully below. This discussion also assumes that each obligation in the DepositAgreement and any related agreement will be performed in accordance with itsterms and that the representations made by the Depositary regarding thepre-release of our ADRs are true.  TheU.S. Treasury has expressed concern that parties to whom ADSs are pre-releasedmay be taking actions that are inconsistent with the claiming of foreign taxcredits.  Such actions would also beinconsistent with claiming the 15% rate described below applicable to certaindividends received by noncorporate holders. Accordingly, the creditability of Chilean taxes and the availability ofthe 15% rate for dividends received by certain noncorporate holders, eachdescribed below, could be affected by actions taken by parties to whom ADSs arepre-released.

 

*Taxation of Distributions*

 

To theextent paid out of our current or accumulated earnings and profits (asdetermined in accordance with U.S. federal income tax principles),distributions made in respect of our ADSs or shares, other than certain rom distributionsof common shares (including amounts withheld by us in respect of Chilean taxes)will be treated as foreign-source dividend income to you and will not beeligible for the dividends-received deduction generally allowed to corporationsunder the Code.  Subject to applicablelimitations and the discussion above regarding concerns expressed by the U.S. Treasury,dividends paid to noncorporate U.S. Holders in taxable years beginning beforeJanuary 1, 2009, will be taxable at a maximum rate of 15%.  U.S. Holders should consult their own taxadvisors regarding the application of this rate in their particularcircumstances.  The amount of anydistribution of property other than cash will be the fair market value of theproperty on the date of distribution.

 

138

----

 

Dividendspaid in Chilean pesos will be includeable in income in a U.S. dollar amountcalculated by reference to the exchange rate in effect on the date you (or inthe case of ADSs, the depositary) actually or constructively receive suchdividends, regardless of whether the pesos are in fact converted into U.S.dollars at that time.  If you holdshares, dividends are treated as received on the date you receive yourdistribution.  If you hold ADSs, thatdate would be the date on which the Depositary receives the distribution.  If items received in pesos are not convertedinto U.S. dollars on the day they are received, you may be required torecognize foreign currency gain or loss (which will be U.S.-source ordinaryincome or loss, as the case may be) upon a subsequent sale or other dispositionof the pesos.

 

*Effect of Chileanwithholding taxes*

* *

Paymentsof dividends on our ADSs or shares to foreign investors are subject to Chileanwithholding taxes.  For U.S. federalincome tax purposes, you will be treated as having received the gross amount ofany dividend paid, including the net amount of Chilean taxes withheld by us,and then as having paid over the withheld taxes to the Chilean taxauthorities.  As a result, the amount ofdividend income includible in gross income for U.S. federal income tax purposesby you in connection with a payment of dividends will be greater than theamount of cash actually received by you.

 

However,subject to generally applicable limitations and restrictions, which may varydepending upon your circumstances, and subject to the discussion aboveregarding concerns expressed by the U.S. Treasury, you will be entitled to acredit against your U.S. federal income tax liability, or a deduction incomputing your U.S. federal taxable income, for the net amount of Chileanincome taxes withheld by us.  Thelimitation on foreign taxes eligible for credit is calculated separately forspecific classes of income.  The rulesgoverning foreign tax credits are complex and, therefore, you are urged toconsult your tax advisor to determine the extent to which you may be entitledto foreign tax credits with respect to dividends paid on our ADSs or shares.

 

*Sale or other disposition*

* *

Upon asale or other disposition of our ADSs or shares, you generally will recognize acapital gain or loss for U.S. federal income tax purposes equal to thedifference between the amount realized on the sale or disposition and youradjusted tax basis in the ADSs or shares. This gain or loss will be long-term capital gain or loss if you held ourADSs or shares for more than one year on the date of disposition.  Capital losses are subject tolimitations.  Any gain or loss willgenerally be U.S.-source gain or loss for foreign tax credit purposes.  Certain gains recognized upon a sale orexchange of our shares (but not ADSs that are disposed of outside Chile) aresubject to Chilean income taxes.  Due togenerally applicable limitations and restrictions, those taxes may not becreditable against your U.S. federal income tax liability.  You are urged to consult your tax advisor todetermine the extent in which you may be entitled to foreign tax credits withrespect to taxes paid with respect to gains recognized upon sale or exchange ofour shares or ADSs.

 

*Passive ForeignInvestment Company rules*

* *

Webelieve that we will not be considered a PFIC for United States federal incometax purposes for the 2005 taxable year. We believe that we have never been a PFIC and that it is unlikely thatwe will become a PFIC in the foreseeable future.  However, because PFIC status depends upon thecomposition of a company’s income and assets and the market value of its assets(including, among others, less-than-25-percent-owned equity investments) fromtime to time, and because it is unclear whether certain types of our incomeconstitute passive income for PFIC purposes, there can be no assurance that wewill not be considered a PFIC for any taxable year.  

 

If wewere treated as a PFIC for any taxable year during which you held an ADS or ashare, certain adverse consequences could apply to you, including theimposition of higher amounts of tax than would otherwise apply and additionaltax form filing requirements.  You areurged to consult your tax advisors regarding the consequences for you if wewere considered to be a PFIC, as well as the availability and advisability ofmaking an election to avoid the adverse United States federal income taxconsequences of PFIC status should we be classified as a PFIC for any taxableyear.

 

139

----

 

*Backup withholding andother reporting requirements*

* *

Paymentof dividends and sales proceeds that are made within the United States orthrough certain U.S.-related financial intermediaries generally are subject toinformation reporting and to backup withholding unless (i) you are acorporation or other exempt recipient or (ii) in the case of backupwithholding, you provide a correct taxpayer identification number and certifythat you are not subject to backup withholding. Backup withholding is not an additional tax.  The amount of any backup withholding from apayment to you will be allowed as a credit against your United States federalincome tax liability and may entitle you to a refund, provided that therequired information is furnished to the Internal Revenue Service.

 

**F.**     Dividendsand paying agents.

 

Notapplicable.

 

**G.**    Statementby experts.

 

Notapplicable.

 

**H.**    Documentson display.

 

We aresubject to the information requirements of the Exchange Act, except that as aforeign issuer, we are not subject to the proxy rules or the short-swing profitdisclosure rules of the Exchange Act.  Inaccordance with these statutory requirements, we file or furnish reports andother information with the SEC.  Reportsand other information filed or furnished by us with the SEC may be inspectedand copied at the public reference facilities maintained by the SEC at Room1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC’s regionaloffices at 233 Broadway, New York, New York 10279 and 475 West JacksonBoulevard, Suite 900, Chicago, Illinois 60604. Copies of such material may also be inspected at the offices of the NewYork Stock Exchange, 11 Wall Street, New York, New York 10005, on which ourADSs are listed, In addition, the SEC maintains a Web site that contains informationfiled electronically with the SEC, which can be accessed over the internet athttp://www.sec.gov.

 

**I.**      SubsidiaryInformation.

 

Notapplicable.

 

**Item11.**     Quantitative and QualitativeDisclosures About Market Risk

 

TheCompany is exposed to risks from changes in interest rates and foreign exchangerates.  These risks are monitored andmanaged by the company in coordination with Enersis, our parent company.  The Company’s board of directors approvesrisk management policies at all levels.

 

TheCompany does not enter into financial instruments for non-trading orspeculative purposes.  As a result, theCompany’s market risk is limited to trading risks.

 

**Commodity PriceRisk**

 

In ourelectricity generation business we are exposed to market risks arising from thevolatility of electricity, natural gas and coal prices.  In order to manage these exposures, we enterinto long-term contracts with suppliers and customers.  In Brazil and Argentina we also enter intocontracts to secure long-term supplies of electricity for our interconnectionbusiness between Argentina and Brazil. All contracts that constitute commodity-price sensitive instruments heldas of December 31, 2005 and 2004 related to electricity were entered into fortrading purposes.

 

We areexposed to the volatility of natural gas prices in the Chilean and Argentinemarkets.  We seek to ensure our supply ofthis commodity by securing long-term contracts with our suppliers for termsthat are expected to match the lifetime of our generation assets.  These contracts generally provide for us topurchase gas at market prices prevailing at the time the purchase occurs.  As of December 31, 2005 and 2004 we did nothold any contracts classified as either derivative financial instruments,financial instruments or derivative commodity instruments related to naturalgas.

 

140

----

 

We areexposed to the volatility of coal prices in the Chilean and Colombian market,We manage our exposure to this commodity by entering into short-term contractswith our suppliers.  We believe that ourexposure to this commodity is immaterial. As of December 31, 2005 and 2004 we did not hold any contractsclassified as either derivative financial instruments, financial instruments orderivative commodity instruments related to coal.

 

Thefollowing tables set forth certain information with respect to electricityprice-sensitive instruments issued or held by the Company as of December 31,2005 and 2004 differentiated by power market and company.  These electricity price sensitive-instrumentsare power forward contracts with multiple delivery dates and require physicaldelivery.  Net settlement is not allowedfor any of the contracts.  Most contractshave optionality features in quantities and prices with indexation clauses tofactors such as inflation indices, foreign currencies and natural gas prices inArgentina.  In the construction of thesetables management makes assumptions using available market data and pricingmodels.  Inputs to pricing models includeestimated forward prices of electricity and natural gas, interest rates,foreign exchange rates, inflation indices, transmission costs and others.  These inputs become more difficult to predictand the estimates less precise as the term of the contract increases.  As a result, fair values are highly dependentupon the assumptions being used. Intercompany amounts have not been eliminated in the following tables.

 

**CHILE**

 
| **ENDESA CHILE**   | ** ** | ** ** | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** | **Fair Value**           | ** ** |
|-------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|-------------------------------|------------|
| ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | **[in U.S.$  millions]** | ** ** |
| Purchase of Electricity |       | GWh        |       | 720        |       | 720        |       | —     |       | —     |       | —     |       | —         |       | 1,440      |       | (24.72                        | )     |
| Weighted Average Price  |       | U.S.$/MWh  |       | 41.0       |       | 42.0       |       | —     |       | —     |       | —     |       | —         |       |       |       |                          |       |

 

**BRAZIL**

 
| **CIEN**                | ** ** | ** ** | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** | **Fair Value**           | ** ** |
|-------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|-------------------------------|------------|
| ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | **[in U.S.$  millions]** | ** ** |
| Sale of Electricity     |       | GWh        |       | 6,367      |       | 6,317      |       | 6,352      |       | 9,196      |       | 9,196      |       | 9,196          |       | 46,624     |       | 291.16                        |       |
| Weighted Average Price  |       | U.S.$/MWh  |       | 33.8       |       | 34.2       |       | 33.5       |       | 33.7       |       | 33.3       |       | 33.3           |       |       |       |                          |       |
| Purchase of Electricity |       | GWh        |       | 751        |       | 651        |       | 688        |       | 5,433      |       | 5,433      |       | 5,433          |       | 18,389     |       | (301.40                       | )          |
| Weighted Average Price  |       | U.S.$/MWh  |       | 18.0       |       | 18.0       |       | 18.0       |       | 30.0       |       | 30.0       |       | 30.0           |       |       |       |                          |       |

 

**ARGENTINA**

 
| **CEMSA**               | ** ** | ** ** | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** | **Fair Value**           | ** ** |
|-------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|-------------------------------|------------|
| ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | **[in U.S.$  millions]** | ** ** |
| Sale of Electricity     |       | GWh        |       | 751        |       | 651        |       | 688        |       | 3,831      |       | 3,831      |       | 3,831          |       | 13,583     |       | 318.02                        |       |
| Weighted Average Price  |       | U.S.$/MWh  |       | 18.0       |       | 18.0       |       | 18.0       |       | 30.0       |       | 30.0       |       | 30.0           |       |       |       |                          |       |
| Purchase of Electricity |       | GWh        |       | —     |       | 1,052      |       | 1,076      |       | 1,138      |       | 4,343      |       | 4,343          |       | 11,952     |       | (220.73                       | )          |
| Weighted Average Price  |       | U.S.$/MWh  |       | —     |       | 17.3       |       | 26.2       |       | 26.2       |       | 29.3       |       | 29.3           |       |       |       |                          |       |

 

**ARGENTINA**

 
| **COSTANERA-CBA**      | ** ** | ** ** | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** | **Fair Value**           | ** ** |
|------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|-------------------------------|------------|
| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | **[in U.S.$  millions]** | ** ** |
| Sale of Electricity    |       | GWh        |       | 451        |       | 390        |       | 413        |       | 3,082      |       | 3,082      |       | 3,082          |       | 10,500     |       | (171.22                       | )     |
| Weighted Average Price |       | U.S.$/MWh  |       | 17.7       |       | 17.7       |       | 17.7       |       | 29.8       |       | 29.8       |       | 29.8           |       |       |       |                          |       |

 

141

----

 

**Interest Rate Risk**

 

AtDecember 31, 2004 and 2005, 10.0% and 7.0%, respectively, of the Company’soutstanding debt obligations were subject to floating interest rates (primarilybased on LIBOR rate).  The Companymanages its risk exposure to interest rates by maintaining debt with both variableand fixed rates.

 

As ofDecember 31, 2005 the recorded values for financial accounting purposes and thecorresponding fair values of the significant financial instruments (includinghedging instruments) which expose the Company to interest rate risk are asfollows:

 
| ** **                          | ** ** | **As of December 31, 2005**             | ** ** |
|-------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                                    | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair value** | ** ** |
| ** **                          | ** ** | **(in millions of constant Ch$ )** | ** ** |
| **Debt:**                           |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Fixed  rate:**                    |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ch$ -  and UF-denominated |       | 147,279                                                     |       | 822 |   | 540 |   | 540 |   | 76,256 |   | 93,602 |   | 319,038 |   | 349,576 |   |
| Weighted average  interest rate     |       | 9.60                                                        | %          | 9.58 | % | 9.58 | % | 9.58 | % | 9.90 | % | — |   | 9.62 | % | — |   |
| U.S.$ denominated              |       | 119,810                                                     |       | 70,132 |   | 225,085 |   | 335,552 |   | 62,156 |   | 477,629 |   | 1,290,364 |   | 1,406,925 |   |
| Weighted average  interest rate     |       | 8.08                                                        | %          | 8.06 | % | 8.10 | % | 7.94 | % | 8.24 | % | — |   | 8.08 | % | — |   |
| Other currencies                    |       | 56,582                                                      |       | 17,330 |   | 16,402 |   | 17,881 |   | 34,036 |   | 88,738 |   | 230,967 |   | 257,011 |   |
| Weighted average  interest rate     |       | 9.78                                                        | %          | 9.54 | % | 9.94 | % | 9.96 | % | 9.89 | % | — |   | 9.79 | % | — |   |
|                                |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Variable  rate**                  | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Ch$ -  and UF-denominated |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average  interest rate     |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.$ denominated  (1)         |       | -13,602                                                     |       | 3,009 |   | 5,871 |   | 15,389 |   | 18,677 |   | 7,445 |   | 36,788 |   | 37,340 |   |
| Weighted average  interest rate     |       | 6.51                                                        | %          | 6.57 | % | 6.26 | % | 5.10 | % | 4.55 | % | — |   | 6.39 | % | — |   |
| Other currencies                    |       | 22,088                                                      |       | 13,138 |   | — |   | 65,277 |   | — |   | — |   | 100,503 |   | 107,892 |   |
| Weighted average  interest rate     |       | 13.75                                                       | %          | 13.20 | % | 12.80 | % | — |   | — |   | — |   | 12.71 | % | — |   |
| **Total**                           |       | 332,155                                                     |       | 104,431 |   | 247,898 |   | 434,639 |   | 191,124 |   | 667,413 |   | 1,977,661 |   | 2,158,744 |   |

 

----

(1)   During 2006 thenegative value of the U.S.$ denominated variable rate debt maturity is due tothe maturity of the asset part of the Libor - UF cross-currency swap.

 

Bycomparison, as of December 31, 2004, the recorded values for financialaccounting purposes and the corresponding fair values of the significantfinancial instruments (including hedging instruments) which expose the Companyto interest rate risk were as follows:

 
| ** **                          | ** ** | **As of December 31, 2004**             | ** ** |
|-------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                                    | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair value** | ** ** |
| ** **                          | ** ** | **(in millions of constant Ch$ )** | ** ** |
| **Debt:**                           |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Fixed  rate:**                    |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ch$ -  and UF-denominated |       | 4,312                                                       |       | 144,445 |   | 3,677 |   | 3,602 |   | 3,811 |   | 166,989 |   | 326,836 |   | 342,450 |   |
| Weighted average  interest rate     |       | 7.76                                                        | %          | 8.04 | % | 8.02 | % | 8.01 | % | 8.00 | % | — |   | 7.95 | % | — |   |
| U.S.$ denominated              |       | 80,825                                                      |       | 136,999 |   | 80,834 |   | 246,889 |   | 365,740 |   | 660,563 |   | 1,571,850 |   | 1,714,607 |   |
| Weighted average  interest rate     |       | 7.28                                                        | %          | 7.27 | % | 7.23 | % | 7.12 | % | 6.45 | % | — |   | 7.14 | % | — |   |
| Other currencies                    |       | 18,752                                                      |       | 58,724 |   | 1,768 |   | 10,258 |   | 7,346 |   | 72,626 |   | 169,474 |   | 174,288 |   |
| Weighted average  interest rate     |       | 10.50                                                       | %          | 11.17 | % | 11.35 | % | 12.03 | % | 11.80 | % | — |   | 11.25 | % | — |   |
|                                |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Variable  rate**                  | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Ch$ -  and UF-denominated |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average  interest rate     |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.$ denominated  (1)         |       | 61,405                                                      |       | -17,932 |   | 809 |   | 809 |   | 6,383 |   | 5,310 |   | 56,785 |   | 56,913 |   |
| Weighted average interest  rate (2) |       | -0.43                                                       | %          | 4.74 | % | 5.01 | % | 5.61 | % | 5.10 | % | — |   | 3.34 | % | — |   |
| Other currencies                    |       | 65,235                                                      |       | 23,607 |   | 16,171 |   | 1,025 |   | 67,601 |   | — |   | 173,639 |   | 175,892 |   |
| Weighted average  interest rate     |       | 13.44                                                       | %          | 13.45 | % | 13.06 | % | 13.00 | % | — |   | — |   | 13.19 | % | — |   |
| **Total**                           |       | 230,530                                                     |       | 345,844 |   | 103,259 |   | 262,583 |   | 450,880 |   | 905,488 |   | 2,298,584 |   | 2,464,149 |   |

 

----

(1)   During 2006 thenegative value of the U.S.$ denominated variable rate debt maturity is due tothe maturity of the asset part of the Libor - UF cross-currency swap.

 

142

----

 

(2)   During 2005 thenegative average interest rate is due to the lower interest rate of the assetportion of the swap.  The negativematurity of 2006 is explained by the same asset portion of the swap.

 

143

----

 

**Foreign CurrencyRisk**

 

TheCompany is exposed to foreign currency risk arising from long-term debtdenominated in U.S. dollars.  This riskis mitigated by the fact that a substantial portion of the Company’s revenuesis linked to the U.S. dollar either directly or indirectly.  As of December 31, 2005, Endesa Chile hadtotal consolidated financial indebtedness of U.S.$ 3,859 million, of whichU.S.$ 2,590 million (net of currency hedging instruments), or approximately67%, was denominated in U.S. dollars. For the twelve-month period ended December 31, 2005, our revenuesamounted to U.S.$ 2,191 million, of which U.S.$ 402 million, orapproximately 18%, were denominated in U.S. dollars, and U.S.$ 981million, or approximately 45%, were linked in some way to the U.S. dollar.  In the aggregate, approximately 63% of ourconsolidated revenues were either in U.S. dollars or correlated to suchcurrency through some form of indexation. On the other hand, the equivalent of U.S.$ 99 million were revenuesin Chilean pesos, which represents approximately 5% of our 2005 consolidatedrevenues.

 

Althoughthe actual foreign currency exchange risk to which we are exposed depends uponthe fluctuation of foreign exchange rates in which monetary assets andliabilities are maintained as compared to the Chilean peso, for accountingpurposes our results from operations are affected by variations in the exchangerate between the U.S. dollar and the Chilean peso due to the application of TechnicalBulletin No. 64.  Under Chileanaccounting standards, the effect of remeasuring the Chilean peso to U.S. dollarexchange rate fluctuations is recorded in equity net of any price levelrestatement due to the effects of Chilean inflation on such foreign investmentamounts.

 

Foreigncurrency gains and losses are included in the results of operations for theperiod together with price-level restatement.

 

As ofDecember 31, 2005 the recorded values for financial accounting purposes and thecorresponding fair values of the significant financial instruments, whichexpose the Company in foreign currency risk, are as follows, according to thedate of maturity:

 
| ** **                                           | ** ** | **As of December 31, 2005**                      | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                                             | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair value (3)** | ** ** |
| ** **                                           | ** ** | **(in millions of constant Ch$ ) (1)** | ** ** |
| **Debt:**                                            |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Fixed  rate:**                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.$ denominated                               |       | 119,810                                                              |       | 70,132 |   | 225,085 |   | 335,552 |   | 62,156 |   | 477,629 |   | 1,290,364 |   | 1,406,925 |   |
| Other currencies                                     |       | 203,860                                                              |       | 18,152 |   | 16,942 |   | 18,421 |   | 110,292 |   | 182,339 |   | 550,006 |   | 606,587 |   |
| **Variable  rate**                                   |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.$ denominated                               |       | (13,602                                                              | )          | 3,009 |   | 5,871 |   | 15,389 |   | 18,677 |   | 7,445 |   | 36,788 |   | 37,340 |   |
| Other currencies                                     |       | 22,088                                                               |       | 13,138 |   | — |   | 65,277 |   | — |   | — |   | 100,503 |   | 107,892 |   |
| **—Other  Instruments (2)**                     |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.$ denominated                               |       | 32,565                                                               |       | 91,879 |   | — |   | — |   | — |   | — |   | 124,444 |   | 124,444 |   |
| Other currencies                                     |       | 136,001                                                              |       | 308 |   | 2,307 |   | 2,307 |   | 2,307 |   | 16,144 |   | 159,374 |   | 159,374 |   |
| Forward contracts  (receive U.S.$/pay Ch$ - UF) |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other foreign  currency derivatives                  |       | 25,625                                                               |       | — |   | — |   | — |   | — |   | — |   | 25,625 |   | (12,990 | ) |

 

----

(1)   Calculated based on the Observed Exchange Rate as of December 31, 2005,which was Ch$ 512.50 = U.S.$ 1.00.

 

(2)   “Other instruments” include cash, time deposits and short-term accountsreceivables.

 

(3)   Fair values were calculated based on the discounted value of futurecash flows expected to be paid (or received), considering current discountrates that reflect the different risks involved.

 

As ofDecember 31, 2004 the recorded values for financial accounting purposes and thecorresponding fair values of the significant financial instruments, whichexpose the Company to foreign currency risk, are as follows, according to thedate of maturity:

 

144

----

 
| ** **                                                | ** ** | **As of December 31, 2004**                      | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **2005**                                                             | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair Value  (3)** | ** ** |
| ** **                                                | ** ** | **(in millions of constant Ch$ ) (1)** | ** ** |
| **Debt:**                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Fixed  rate:**                                          |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.$ denominated                                    |       | 80,825                                                               |       | 136,999 |   | 80,834 |   | 246,889 |   | 365,740 |   | 660,563 |   | 1,571,850 |   | 1,714,607 |   |
| Other currencies                                          |       | 23,064                                                               |       | 203,169 |   | 5,445 |   | 13,860 |   | 11,157 |   | 239,615 |   | 496,310 |   | 516,738 |   |
| **Variable  rate**                                        |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.$ denominated                                    |       | 61,405                                                               |       | -17,932 |   | 809 |   | 809 |   | 6,383 |   | 5,310 |   | 56,785 |   | 56,913 |   |
| Other currencies                                          |       | 65,235                                                               |       | 23,607 |   | 16,171 |   | 1,025 |   | 67,601 |   | — |   | 173,639 |   | 175,892 |   |
| **—Other  Instruments(2)**                           |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.$ denominated                                    |       | 220,294                                                              |       | 3,510 |   | — |   | — |   | — |   | — |   | 223,804 |   | 223,804 |   |
| Other currencies                                          |       | 212,097                                                              |       | 26,782 |   | 1,418 |   | 793 |   | 432 |   | 308 |   | 241,830 |   | 241,830 |   |
| Forward contracts  (receive U.S.$/pay Ch$ - UF) |       | 43,477                                                               |       | 180,040 |   | — |   | — |   | — |   | — |   | 223,517 |   | 223,517 |   |
| Other foreign  currency derivatives                       |       | (70                                                                  | )          | (10,831 | ) | — |   | — |   | — |   | — |   | (10,901 | ) | (10,901 | ) |

 

----

(1)   Calculated based on the Observed Exchange Rate as of December 31, 2004,which was Ch $557.40 = U.S.$ 1.00.

 

(2)   “Other instruments” include cash, time deposits and short-term accountsreceivables.

 

(3)   Fair values were calculated based on the discounted value of futurecash flows expected to be paid (or received), considering current discountrates that reflect the different risks involved.

 

**D.**    SafeHarbor 

 

Theinformation in this Item 11. Quantitative and Qualitative Disclosures About Market Risk, containsstatements that may constitute forward looking statements.  See “Forward Looking Statements” in theIntroduction to this report for safe harbor provisions.

 

**Item12.**Description of Securities otherthan Equity Securities

 

**A.**    DebtSecurities.

 

[Notapplicable.]

 

**B.**    Warrantsand Rights.

 

[Notapplicable.]

 

**C.**    OtherSecurities.

 

[Notapplicable.]

 

**D.**    AmericanDepositary Shares.

 

[Notapplicable.]

 

145

----

 

**PART II**

** **

**Item13.**Defaults, Dividend Arrearages andDelinquencies

 

[None.]

 

**Item14.**Material Modifications to theRights of Security Holders and Use of Proceeds

 

[None.]

 

**E.**     Useof proceeds.

 

[Notapplicable.]

 

**Item15.**Controls and Procedures

 

Inorder to meet the requirements of the Sarbanes-Oxley Act, in 2003 Endesa Chilebegan to implement a system of controls within the parameters of Sections 404and 302.  The critical areas in which thestandards of control required improvement were detected in the first stage ofthis project, which was completed in 2003. The improvements recommended were implemented during 2004 and 2005 andthe results of the evaluation of the effectiveness of control and procedureshave not revealed any material weakness.

 

EndesaChile’s management, under the supervision the Chief Executive Officer and theChief Financial Officer, performed an evaluation of the effectiveness of itsdisclosure controls and procedures as of December 31, 2005.

 

Basedon this evaluation, Endesa Chile’s Chief Executive Officer and Chief FinancialOfficer concluded that Endesa Chile’s disclosure controls and procedures areeffective at the reasonable assurance level for gathering, analyzing anddisclosing the information Endesa Chile is required to disclose in the reportsit files under the Securities Exchange Act of 1934, within the time periodsspecified in the SEC’s rules and forms. Endesa Chile’s management applied its judgment in assessing the costsand benefits of such controls and procedures, which by their nature can provideonly reasonable assurance regarding management’s control objectives.

 

Therehave been no significant changes in Endesa Chile’s internal control overfinancial reporting that occurred during the period covered by this annualreport that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**Item 16.**         [Reserved]

 

**Item16A.**      Audit Committee FinancialExpert

 

OurBoard of Directors has determined that José Fernández O. is an audit committeefinancial expert as defined under Item 16A of Form 20-F, is serving on theaudit committee and is an independent member of the audit committee.  See “Item 6. Directors, Senior Management andEmployees—C. Board Practices” for more details.

 

**Item 16B.**      Codeof Ethics

 

Thestandards of ethical conduct in Endesa Chile are governed by means of twocorporate rulings on policies: the Charter Governing Executives and theInternal Regulations on Conduct in Securities Markets.

 

TheCharter Governing Executives was adopted by the Board of Directors in June 2003and is applicable to all managers contractually related to Endesa Chile or itscontrolled subsidiaries in which it is the majority shareholder, both in Chileand internationally, including the Chief Executive Officer, the Chief FinancialOfficer and other senior financial officers of the Company.  The object of this set of rules, introducedinto the contracts of those subject to its compliance, is to establish thebehavior of management with respect to the principles governing their actions,and the limitations and incompatibilities involved, all within Endesa Chile’svision, mission and values.  

 

146

----

 

TheInternal Regulations on Conduct in Securities Markets, adopted by Endesa Chile’sBoard of Directors in June 2002, set the behavior criteria to be followed inmarket operations in order to contribute to their transparency and theprotection of investors, and is applicable to the members of the Board ofDirectors, the senior executives, and the executives and employees of EndesaChile determined by the Chief Executive Officer, and known to the Chairman, whowork in areas related to the securities market or have access to privilegedinformation.

 

TheInternal Regulations on Conduct in Securities Markets and the Charter GoverningExecutives are accessible via Endesa Chile’s corporate website at www.endesa.cl(the information found at this Web site is not incorporated by reference intothis report).  A copy of these documentsis also available upon request, free of charge, by writing or telephoning usat:

 

Empresa Nacionalde Electricidad S.A.

Attention:Investor Relations Department

Santa Rosa 76

Santiago, Chile

Republic of Chile

(562) 630 9000

 

**Item16C.**      Principal Accountant Feesand Services

 

Thefollowing table provides information on the aggregate fees billed by ourprincipal accountants, Ernst & Young, by type of service rendered for theperiods indicated:

 
| **Services Rendered** | ** ** | **2004**                                | ** ** | **2005** | ** ** |
|----------------------------|------------|-----------------------------------------|------------|----------|------------|
| ** **                 | ** ** | **(millions of U.S.$ )** | ** ** |
| Audit Fees                 |       | 0.59                                    |       | 0.64     |       |
| Audit-Related Fees (1)     |       | 0.08                                    |       | 0.01     |       |
| Tax Fees (2)               |       | 0.03                                    |       | 0.10     |       |
| All Other Fees             |       | —                                  |       | —   |       |
| Total                      |       | 0.70                                    |       | 0.75     |       |

 

----

(1)   During 2005, nosignificant audit related services were rendered by our external auditor.  In 2004, includes fees for: assistanceservices rendered in relation with Endesa’s readiness plan to comply withSarbanes-Oxley’s section 404 requirements (U.S.$ 80,000).

 

(2)   In 2005, includesfees paid for tax consultancy work in Peru and Chile (amounted toU.S.$ 99,000 and U.S.$ 600, respectively).  In 2004, includes fees paid for taxconsultancy work in Peru (amounted to U.S.$ 26,000).

 

Theamounts included in the table above and the related footnotes have beenclassified in accordance with Public Company Accounting Oversight Board (PCAOB)guidance.

 

***Audit Committee Pre-Approval Policies and Procedures***

*** ***

Endesa’sexternal auditors are appointed by its shareholders at the annual shareholders’meeting.  Similarly, the shareholders ofour subsidiaries, which are located in countries where applicable law andregulation so establishes, appoint such subsidiaries’ external auditors.

 

TheAudit Committee, through the internal audit department, manages appointmentproposals, review of engagement letters, fee negotiations, quality control inrespect of the services provided, review and control of independence issues andother related matters.

 

TheAudit Committee has a pre-approval policy regarding the contracting of Endesa’sexternal auditor, or any affiliate of the external auditor, for professionalservices.  The professional servicescovered by such policy include audit and non-audit services provided to Endesa.

 

147

----

 

Feespayable in connection with recurring audit services are approved as part of ourannual budget.  Fees payable inconnection with nonrecurring audit services, once they have been analyzed bythe internal audit department, are submitted to the Audit Committee forapproval or denial.

 

Thepreapproval policy established by the Audit Committee for non-audit services isas follows:

 

•      The businessunit that has requested the service and the audit firm requested to perform theservice must request that the corporate audit manager review the nature of theservice to be provided.

 

•      At that point,the corporate audit department analyzes the request and requires the audit firmthat has been requested to provide the service to issue a certificate signed bythe partner responsible for the audit of our consolidated financial statementsconfirming such audit firm’s independence.

 

•      Finally, theproposal is submitted to the audit and Control Committee for approval ordenial.

 

Allservices described in footnotes (1) and (2) to the table above were approved inline with the procedure described immediately above since July 2005.  Before, any services provided by Ernst &Young Limited that are not specifically included within the scope of the auditmust be preapproved by the Board of Directors prior to any engagement.

 

**Item16D.**      Exemptions from ListingRequirements for Audit Committees

 

NotRequired.

 

**Item16E.**       Purchases of EquitySecurities by the Issuer and Affiliated Persons

 

**ISSUER PURCHASES OF EQUITY SECURITIES**

 
| **Date**          | ** ** | **(a) Total Number of Shares  (or Units) Purchased** | ** ** | **(b) Average Price Paid per  Share (or Units)** | ** ** | **(c) Total Number of  Shares (or Units)  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **(d) Maximum Number  (or Approximate U.S.  Dollar Value) of Shares  (or Units) that May Yet  Be Purchased Under the  Plans or Programs** | ** ** |
|-------------------|------------|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| May 5, 2005       |       | 8,425,707  ordinary shares                                                         |       | U.S.$1.22                                                                      |       | Not applicable                                                                                                                                                 |       | Not applicable                                                                                                                                                                                                            |       |
| May 18, 2005      |       | 4,910,115  ordinary shares                                                         |       | U.S.$1.24                                                                      |       | Not applicable                                                                                                                                                 |       | Not applicable                                                                                                                                                                                                            |       |
| May 27, 2005      |       | 34,719,704  ordinary shares                                                        |       | U.S.$1.24                                                                      |       | Not applicable                                                                                                                                                 |       | Not applicable                                                                                                                                                                                                            |       |
| August 2, 2005    |       | 5,781,629  ordinary shares                                                         |       | U.S.$1.29                                                                      |       | Not applicable                                                                                                                                                 |       | Not applicable                                                                                                                                                                                                            |       |
| August 23, 2005   |       | 5,495,276  ordinary shares                                                         |       | U.S.$1.34                                                                      |       | Not applicable                                                                                                                                                 |       | Not applicable                                                                                                                                                                                                            |       |
| August 29, 2005   |       | 6,301,893  ordinary shares                                                         |       | U.S.$1.33                                                                      |       | Not applicable                                                                                                                                                 |       | Not applicable                                                                                                                                                                                                            |       |
| September 2, 2005 |       | 2,017,219  ordinary shares                                                         |       | U.S.$1.34                                                                      |       | Not applicable                                                                                                                                                 |       | Not applicable                                                                                                                                                                                                            |       |
| November 14, 2005 |       | 632,321  ordinary shares                                                           |       | U.S.$1.39                                                                      |       | Not applicable                                                                                                                                                 |       | Not applicable                                                                                                                                                                                                            |       |
| November 28, 2005 |       | 5,065,561  ordinary shares                                                         |       | U.S.$1.41                                                                      |       | Not applicable                                                                                                                                                 |       | Not applicable                                                                                                                                                                                                            |       |
| December 15, 2005 |       | 4,848,783  ordinary shares                                                         |       | U.S.$1.44                                                                      |       | Not applicable                                                                                                                                                 |       | Not applicable                                                                                                                                                                                                            |       |
| January 3, 2006   |       | 3,666,798  ordinary shares                                                         |       | U.S.$1.45                                                                      |       | Not applicable                                                                                                                                                 |       | Not applicable                                                                                                                                                                                                            |       |

 

148

----

 

**PARTIII**

 

**Item17.**Financial Statements

 

None.

 

**Item18.**Financial Statements

 

**Endesa Chile and Subsidiaries**

 

**Index to the Audited Consolidated FinancialStatements**

 
| **Reports of Independent Registered Public  Accounting Firms:**                                                                                                                                      | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| Report  of Independent Registered Public Accounting Firm—Empresa Nacional de  Electricidad S.A. (Endesa Chile) 2003, 2004 and 2005                                                              | ** ** | ** ** |
| Report of  Independent Registered Public Accounting Firm—Endesa Argentina S.A. 2003,  2004 and 2005                                                                                             |       |       |
| Report  of Independent Registered Public Accounting Firm—Central Hidroeléctrica de  Betania S.A. E.S.P. 2003, 2004 and 2005                                                                |       |       |
| Report  of Independent Registered Public Accounting Firm—Endesa Colombia S.A. 2003                                                                                                              |       |       |
| Report  of Independent Registered Public Accounting Firm—Centrais Eléctricas  Cachoeira Dourada S.A. 2003                                                                                  |       |       |
| Report of Independent Registered  Public Accounting Firm—CIEN—Companhia de Interconexao Energética 2003                                                                               |       |       |
| Report  of Independent Registered Public Accounting Firm—Endesa Brasil S.A. 2005.                                                                                                               |       |       |
| Report of Independent Registered  Public Accounting Firm—Centrais Electricas Cachoeira Dourada S.A. 2005                                                                                        |       |       |
| Report of Independent Registered  Public Accounting Firm—Central Geradora Termeletrica Fortaleza 2005                                                                                           |       |       |
| Report of Independent Registered  Public Accounting Firm—CIEN—Companhia de Interconexao Energetica 2005                                                                                    |       |       |
|                                                                                                                                                                                                 |       |       |
| **Consolidated Financial Statements:**                                                                                                                                                               | ** ** | ** ** |
| Consolidated  Balance Sheets as of December 31, 2004 and 2005                                                                                                                                        |       |       |
| Consolidated  Statements of Income for the years ended December 31, 2003, 2004 and 2005                                                                                                              |       |       |
| Consolidated  Statements of Shareholders’ Equity for the years ended December 31, 2003,  2004 and 2005                                                                                          |       |       |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2003, 2004 and 2005                                                                                                          |       |       |
| Notes  to the Consolidated Financial Statements                                                                                                                                                      | ** ** | ** ** |
| Schedule I—Condensed financial  information of Empresa Nacional de Electricidad S.A. (Endesa-Chile)                                                                                             |       |       |
| Consolidated Financial  Statements of CIEN—Companhia de Interconexao Energética 2003 and 2004 and  Comercializadora de Energía del Mercosur S.A. 2003, 2004 and 2005 (See Note 32  o) |       |       |

 

**Item 19.**Exhibits

 
| **Exhibit** | ** ** | **Description**                                                                                                          |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------|
| 1.1         |       | By-laws (Estatutos) of Empress Nacional de  Electricidad S A., as amended.*                                              |
| 1.2         |       | By-laws (Estatutos) of Empress Nacional de  Electricidad S.A., as amended (English translation).*                   |
| 8.1         |       | List of Subsidiaries.                                                                                                    |
| 12.1        |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act.                             |
| 12.2        |       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act.                             |
| 13.1        |       | Certification of Chief Executive Officer and Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act. |

 

----

*      Incorporated byreference to Empresa Nacional de Electricidad S.A. Annual Report on Form20-F for the year ended December 31, 2001 filed with the Securities andExchange Commission on July 1, 2002.

 

Wewill furnish to the Securities and Exchange Commission, upon request, copies ofany unfiled instruments that define the rights of holders of long-term debt ofEmpresa Nacional de Electricidad S.A.

 

149

----

 

**SIGNATURES**

 

Theregistrant certifies that it meets all of the requirements for filing on Form20-F and that it has duly caused and authorized the undersigned to sign thisamendment to the annual report on its behalf.

 
| ** ** | **EMPRESA NACIONAL DE  ELECTRICIDAD S.A** |
|------------|-------------------------------------------|
|       |                                      |
|       |                                      |
|       | By:                                       |  /s/ Rafael  Mateo A. |   |
|       | Name:                                     | Rafael Mateo A. |
|       | Title:                                    | Chief Executive Officer |
|            |                                           |  |  |  |

 

Date: March 16, 2006

 

150

----

 

**Endesa Chileand Subsidiaries**

 

**Audited Consolidated FinancialStatements as of**

**December 31, 2004 and 2005 andfor each of the three years in the period ended December 31, 2005 together withthe Reports of Independent Registered Public Accounting Firms**

 

----

 

**Endesa Chile and Subsidiaries**

 

**Index to the Audited Consolidated FinancialStatements**

 
| **Reports of Independent Registered Public  Accounting Firms:**                                                                                                                                      | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| Report of Independent Registered Public Accounting  Firm—Empresa Nacional de Electricidad S.A. (Endesa Chile) 2003, 2004 and 2005                                                               | ** ** | ** ** |
| Report of Independent Registered Public Accounting  Firm—Endesa Argentina S.A. 2003, 2004 and 2005                                                                                              |       |       |
| Report of Independent Registered Public Accounting  Firm—Central Hidroeléctrica de Betania S.A. E.S.P. 2003, 2004 and 2005                                                                 |       |       |
| Report of Independent Registered Public Accounting  Firm—Endesa Colombia S.A. 2003                                                                                                              |       |       |
| Report of Independent Registered Public Accounting  Firm—Centrais Eléctricas Cachoeira Dourada S.A. 2003                                                                                   |       |       |
| Report of Independent Registered  Public Accounting Firm—CIEN—Companhia de Interconexao Energética 2003                                                                               |       |       |
| Report of Independent Registered Public Accounting  Firm—Endesa Brasil S.A. 2005.                                                                                                               |       |       |
| Report of Independent Registered  Public Accounting Firm—Centrais Electricas Cachoeira Dourada S.A. 2005                                                                                        |       |       |
| Report of Independent Registered  Public Accounting Firm—Central  Geradora Termeletrica Fortaleza 2005                                                                                          |       |       |
| Report of Independent Registered  Public Accounting Firm—CIEN-Companhia  de Interconexao Energetica  2005                                                                                       |       |       |
|                                                                                                                                                                                                 |       |       |
| **Consolidated Financial Statements:**                                                                                                                                                               | ** ** | ** ** |
| Consolidated Balance Sheets as of December 31, 2004 and  2005                                                                                                                                        |       |       |
| Consolidated Statements of Income for the years ended  December 31, 2003, 2004 and 2005                                                                                                              |       |       |
| Consolidated Statements of Shareholders’ Equity for the  years ended December 31, 2003, 2004 and 2005                                                                                           |       |       |
| Consolidated Statements of Cash Flows for the years ended  December 31, 2003, 2004 and 2005                                                                                                          |       |       |
| Notes to the Consolidated Financial Statements                                                                                                                                                       | ** ** | ** ** |
| Schedule I—Condensed financial  information of Empresa Nacional de Electricidad S.A. (Endesa-Chile)                                                                                             |       |       |
| Consolidated Financial  Statements of CIEN—Companhia de Interconexao Energética 2003 and 2004 and  Comercializadora de Energía del Mercosur S.A. 2003, 2004 and 2005 (See Note 32  o) |       |       |

 
|   | Ch$   | — | Chilean pesos                                                                                                                                                            |
|--------|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | US$   | — | United States dollars                                                                                                                                                    |
|   | UF    | — | The UF is a Chilean inflation-indexed, peso-denominated monetary unit  that is set daily in advance based on the previous month’s inflation rate  (see Note 2 (b)). |
|   | ThCh$ | — | Thousands of Chilean pesos                                                                                                                                               |
|   | ThUS$ | — | Thousands of United States dollars                                                                                                                                       |

 

**Applicationof Constant Chilean Pesos**

 

The consolidated financial statements included herein have beenrestated for general price-level changes and expressed in constant Chileanpesos of December 31, 2005 purchasing power.

 

----

 
|                  | • Huéríanos 770, 5 Piso   Santiago, Chile | • Teléfono | : (56-2) 676 1000 |
|------------------|--------------------------------------------------------------------|----------------------|-------------------|
|    Fax | : (56-2) 676 1010                                                  |
|             |                                                               |    Casilla | : 2823            |

   

**Report of Independent Registered Public AccountingFirm**

**(Translationof report originally issued in Spanish-See Note 2 (a))**

 

To the Board of Directors andShareholders ofEmpresa Nacional de Electricidad S.A. (Endesa-Chile):

 

We have audited theaccompanying consolidated balance sheets of Endesa-Chile and its Subsidiaries(the “Company”) as of December 31, 2004 and 2005, and the related consolidated statements ofincome, changes in shareholders’ equity and cash flows for each of the threeyears in the period ended December 31, 2005. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financial statementsbased on our audits. We did not audit the consolidated financial statements ofcertain subsidiaries, which statements reflect total assets representing 38.87percent and 40.89 percent as of December 31, 2004 and 2005, respectively, and total revenues representing of 39.38 percent, 38.78percent and 37.39 percent for each of the three years in the period endedDecember 31, 2005, respectively. We also did not audit the financial statementsof certain investments accounted for under the equity method, which represented0.18 percent and 7.7 percent of total consolidated assets as of December 31,2004 and 2005, respectively, and the equity in their netresults represented 14.87 percent, 0.74 percent and 11.7 percent of theconsolidated net income for each of the years in the period ended December 31, 2003, 2004 and 2005, respectively. Those statements were audited by otherauditors whose reports have been furnished to us, and our opinion, insofar asit relates to the amounts included for those entities, is based solely on thereports of the other auditors.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. We were not engaged to perform an audit of the Company’sinternal control over financial reporting. Our audit included consideration ofinternal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. An auditalso includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits and the reports ofother auditors provide a reasonable basis for our opinion.

 

In our opinion, based on ouraudits and the reports of other auditors, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Endesa-Chile and subsidiaries at December 31, 2004 and 2005, and the results of their operations and theircash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in Chile,which differ in certain respects from accounting principles generally acceptedin the United States of America (see Note 32 to the consolidated financialstatements). Also, in our opinion, the related financial statement schedule,when considered in relation to the basic financial statements taken as a whole,presents fairly, in all material respects, the information set forth therein.

 

As described in Notes 3 and32(d), beginning on January 1, 2004 the Company changed its method ofaccounting for staff severance indemnities to record the future obligationusing an actuarial valuation.

 
| ERNST  & YOUNG LTDA. |  |
|--------------------------|--|

 

 

Santiago, Chile

January 19, 2006

(Except for Notes 30 and 32for which the date is March 10, 2006)

 

Firma miembro de Ernst & Young Global

 

F-1

----

 

 
|   | Deloitte & Co. S.R.L. |
|--------|---------------------------|
|   | Florida 234 5°       |
|   | Capital Federal           |
|   | C1005AAF                  |
|   | Argentina                 |
|   |                      |
|   | Tel: 54 (11) 4320-2700 /  |
|   | 4326-4046                 |
|   | Fax: 54 (11) 4325-8081    |
|   | www.deloitte.com.ar       |

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

** **

To the President and Boardof Directors of

**EndesaArgentina S.A.:**

** **

We have audited theconsolidated balance sheets of Endesa Argentina S.A. and Subsidiaries (the “Company”)as of December 31, 2004 and 2005 and the consolidated statements of operationsand cash flows for each of the three years in the period ended December 31,2005 (none of which are presented herein). These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. The Company is not required to have, nor were we engagedto perform, an audit of its internal control over financial reporting. Ouraudits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Endesa Argentina S.A. and subsidiaries as of December 31,2004 and 2005, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2005 in conformitywith accounting principles generally accepted in Chile.

 

Accounting principlesgenerally accepted in Chile vary in certain significant respects fromaccounting principles generally accepted in the United States of America. The applicationof the latter would have affected the determination of net income for each ofthe three years in the period ended December 31, 2005 and the determination ofshareholders’ equity at December 31, 2004 and 2005, to the extent summarized inNote 39.

 

**DELOITTE& Co. S.R.L.**

 

 

Carlos A. Lloveras

Buenos Aires, March 7, 2006

 

 

*Deloitterefers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its memberfirms, and their respective subsidiaries and affiliates. As a Swiss Verein(association), neither Deloitte Touche Tohmatsu nor any of its member firms hasany liability for each other’s acts or omissions. Each of the member firms is aseparate and independent legal entity operating under the names “Deloitte,”“Deloitte & Touche,” “Deloitte Touche Tohmatsu,” or other related names.Services are provided by the member firms or their subsidiaries or affiliatesand not by the Deloitte Touche Tohmatsu Verein.*

 

F-2

----

 

 
|   | Deloitte & Touche Ltda.   |
|--------|-------------------------------|
|   | Cra. 7 N° 74 - 09        |
|   | A.A. 075874                   |
|   | Nit. 860.005.813-4            |
|   | Bogotá D.C.              |
|   | Colombia                      |
|   |                          |
|   | Tel. +57(1) 5461810 - 5461815 |
|   | Fax: +57(1) 2178088           |
|   | www.deloitte.com.co           |

 

**Report of Independent Registered Public Accounting Firm**

 

To the Board of Directors and Shareholders of

Central Hidroeléctrica de Betania S.A. E.S.P. and subsidiaries:

 

We have audited the consolidated balance sheets of CentralHidroeléctrica de Betania S.A. E.S.P. and subsidiaries (the “Company”) as ofDecember 31, 2005 and 2004 and the related consolidated statements of incomeand cash flows for the three years in the period ended December 31, 2005, allexpressed in thousands of constant Chilean pesos (none of which are presentedherein). These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of Central Hidroeléctrica deBetania S.A. E.S.P. and subsidiaries as of December 31, 2005 and 2004, and theresults of their operations and their cash flows for the three years in theperiod ended December 31, 2005 in conformity with accounting principlesgenerally accepted in Chile.

 

Accounting principles generally accepted in Chile vary in certainsignificant respects from accounting principles generally accepted in theUnited States of America. The application of the latter would have affected thedetermination of net income for each of the three years ended December 31, 2005and the determination of shareholders’ equity at December 31, 2005 and 2004 tothe extent summarized in Note 27.

 
|  |   |  |
|--|--------|--|

Carlos Eduardo Tovar

Bogotá, Colombia, March 9, 2006

DELOITTE & TOUCHE LTDA.

 
|                                                             | Una firma miembro de     |
|------------------------------------------------------------------|--------------------------|
| Auditoría.Impuestos.Consultoría.Finanzas Corporativas. | Deloitte Touche Tohmatsu |

 

 

F-3

----

 

 
|   | Deloitte & Touche Ltda.   |
|--------|-------------------------------|
|   | Cra. 7 N° 74 - 09        |
|   | A.A. 075874                   |
|   | Nit. 860.005.813-4            |
|   | Bogotá D.C.              |
|   | Colombia                      |
|   |                          |
|   | Tel. +57(1) 5461810 - 5461815 |
|   | Fax: +57(1) 2178088           |
|   | www.deloitte.com.co           |

 

**Report ofIndependent Registered Public Accounting Firm**

 

To the Board of Directors and Shareholders of

Endesa de Colombia S.A.:

 

We have audited the consolidated statements of income and cash flowsfor the year ended December 31, 2003 of Endesa de Colombia S.A. (the“Company”), all expressed in thousands of constant Chilean pesos (neither ofwhich are presented herein). These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audit.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perfonn, an audit of its internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

 

In our opinion, such financial statements present fairly, in allmaterial respects, the results of operations and cash flows of Endesa deColombia S.A. for the year ended December 31, 2003, in conformity with accountingprinciples generally accepted in Chile.

 

Accounting principles generally accepted in Chile vary in certainsignificant respects from accounting principles generally accepted in theUnited States of America. The application of the latter would have affected thedetermination of net income for the year ended December 31, 2003 to the extentsimmirized in Note 18.

 
|                                                                 |                        |  |
|----------------------------------------------------------------------|-----------------------------|--|
|                                                                      |                        |
| Carlos Eduardo Tovar                                                 |
| Bogotá, Colombia, January 15, 2004,                             |
| except for Note 18  for which  the date is April 30, 2004  | DELOITTE & TOUCHE LTDA. |

 

 
|                                                             | Una firma miembro de     |
|------------------------------------------------------------------|--------------------------|
| Auditoría.Impuestos.Consultoría.Finanzas Corporativas. | Deloitte Touche Tohmatsu |

 

F-4

----

 

REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM

 

To the Board of Directors and Shareholdersof 

Centrais Elétricas CachoeiraDourada S.A. 

Cachoeira Dourada -GO. Brazil

 

We have audited the statementsof operations and cash flows of Centrais Elétricas Cachoeira Dourada S.A. (the"Company") for the year ended December 31, 2003, all expressed inUnited States dollars (neither of which are presented herein).  These financial statements are theresponsibility of the Company's management. Our responsibility is to express anopinion on these financia1 statements based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financia1 statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audit included considerationof internal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company's internal controlover financial reporting.  Accordingly,we express no such opinion. An audit also includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, such financialstatements present fairly, in all material respects, the results of operationsand cash f1ows of Centrais Elétricas Cachoeira Dourada S.A. for the year endedDecember 31, 2003, in conformity with accounting principles generally acceptedin Chile.

 

Accounting principles generallyaccepted in Chile vary in certain significant respects from accountingprinciples generally accepted in the United States of America.  The application of the latter would haveaffected the determination of net income for the year ended December 31, 2003,to the extent summarized in Note 21 to the financial statements.

 

 

Rio de Janeiro, Brazil January17, 2004

 

F-5

----

 

REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM

 

To the Board of Directors andShareholders of 

CIEN - Companhia deInterconexão Energética 

Rio de Janeiro - RJ, Brazil

 

We have audited the statementsof income and cash flows of CIEN Companhia de Interconexão Energética (the"Company") as of December 31, 2003, all expressed in United Statesdollars (neither of which are presented herein).  These financial statements are theresponsibility of the Company's management. Our responsibility is to express an opinion on these financialstatements based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company's internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, such financialstatements present fairly, in all material respects, the results of operationsand cash flows of CIEN - Companhia de Interconexão Energética S.A. for the yearended December 31, 2003, in conformity with accounting principles generallyaccepted in Chile.

 

Accounting principles generallyaccepted in Chile vary in certain significant respects from accountingprinciples generally accepted in the United States of America.  The application of the latter would haveaffected the determination of net income for the year ended December 31, 2003,to the extent summarized in Note 23 to the financial statements.

 

As discussed in Note 24, thefinancial statements have been restated.

 

 

Rio de Janeiro, Brazil January17, 2004 (except for Note 24, for which the date is May 2, 2005)

 

F-6

----

 

 
|   | Deloitte  & Touche                     |
|--------|--------------------------------------------|
|   | Sociedad de  Auditores y Consultores Ltda. |
|   | RUT:  80.276.200-3                         |
|   | Av.  Providencia 1760                      |
|   | Pisos 6, 7,  8 y 9                         |
|   | Providencia,  Santiago                     |
|   | Chile                                      |
|   | Fono: (56-2)  270 3000                     |
|   | Fax: (56-2)  374 9177                      |
|   | e-mail:  deloittechile@deloitte.com        |
|   | www.deloitte.cl                            |

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Shareholders of EndesaBrasil S.A.:

 

We have audited the accompanyingconsolidated balance sheet of Endesa Brasil S.A. and subsidiaries (the“Company”) as of December 31, 2005, and the related consolidated statements ofoperations, shareholders’ equity and cash flows for the three month period thenended (expressed in constant Chilean pesos) (none of which are presentedherein). These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audit.  We did not audit the financial statements forthe three month period ended December 31, 2005 of certain of the Company’sconsolidated subsidiaries, which statements reflect total assets constituting35.95% of consolidated total assets at December 31 2005 and total revenuesconstituting 9.92% of consolidated total revenues for the three month periodthen ended.  With respect to theconsolidated shareholders’ equity and net income information stated on thebasis of accounting principles generally accepted in the United States ofAmerica (“U.S. GAAP”) in Note 24, these financial statements reflect totalshareholders’ equity constituting 48.04% of consolidated U.S. GAAP basisshareholders’ equity at December 31, 2005 and total net income constituting12.25%, of consolidated U.S. GAAP basis net income for the three month periodthen ended. Such financial statements were audited by other auditors whosereports have been provided to us and our opinion, insofar as it relates to theamounts included for these companies, is based solely on the reports of suchother auditors.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion.  An audit also includes examining,on a test basis, evidence supporting the amounts and disclosures in thefinancial statements, assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe thatour audit and the reports of the other auditors provide a reasonable basis forour opinion.

 

In our opinion, based on ouraudit and the reports of the other auditors, such consolidated financialstatements present fairly, in all material respects, the financial position ofEndesa Brasil S.A. and subsidiaries as of December 31, 2005, and the results oftheir operations, changes in their shareholders’ equity and their cash flowsfor the three month period then ended, in conformity with accountingprinciples generally accepted in Chile.

 

Accounting principles generally accepted inChile vary in certain significant respects from U.S. GAAP. The application ofthe latter would have affected the determination of net income for the threemonths period ended December 31, 2005, and the determination of shareholders’equity as of December 31, 2005, to the extent summarized in Note 24 to theconsolidated financial statements.

 

 

Santiago, Chile

March 8, 2006.

 

F-7

----

 
|  | Praia de Botafogo, 300 - 13o andar

22250-040 - Rio de Janeiro, RJ, Brasil

  | Fone: (55)  (21) 2109-1400

Fax: (55)  (21) 2109-1600

homepage: www.ey.com.br |
|--|-----------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------|

** **

**Report ofIndependent Registered Public Accounting Firm**

** **

** **

To the Board of Directors and Shareholders of

Centrais Electricas Cachoeira Dourada S.A. - CDSA

 

We have audited the accompanying balance sheetof Centrais Electricas Cachoeira Dourada S.A. – CDSA (the“Company”) as of December 31, 2005, and the related statements of income,changes in shareholders' equity and cash flows for the three-month period endedDecember 31, 2005. These financial statements are the responsibility of theCompany's management. Our responsibility is to express an opinion on thesefinancial statements based on our audit. 

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the financialposition of Centrais Electricas Cachoeira Dourada S.A. - CDSAas of December 31, 2005, and the results of its operations and its cash flowsfor the three-month period ended December 31, 2005 in conformity withaccounting principles generally accepted in Chile, which differ in certainrespects from accounting principles generally accepted in the United Statesof America (see Note 21 to the financial statements). 

 

 

 

Rio de Janeiro, Brazil, January13, 2006

 

ERNST & YOUNG

Auditores Independentes S.S.

 

 
|   | /s/ Claudio Camargo |   |
|--------|---------------------|--------|
|   | Claudio Camargo     |   |
|   | Partner             |   |

 

 

F-8

----

 
|  | Praia de Botafogo, 300 - 13o andar

22250-040 - Rio de Janeiro, RJ, Brasil

  | Fone: (55)  (21) 2109-1400

Fax: (55)  (21) 2109-1600

homepage: www.ey.com.br |
|--|-----------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------|

 

**Report ofIndependent Registered Public Accounting Firm**

 

 

To the Board of Directors and Shareholders of

CentralGeradora Termeletrica Fortaleza - CGTF

 

We have audited the accompanying balance sheetof Central Geradora Termeletrica Fortaleza– CGTF (the “Company”) as ofDecember 31, 2005, and the related statements of income, changes in shareholders'equity and cash flows for the three-month period ended December 31, 2005. Thesefinancial statements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements based onour audit. 

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the financialposition of Central Geradora Termeletrica Fortaleza- CGTF as of December 31, 2005,and the results of its operations and its cash flows for the three-month periodended December 31, 2005 in conformity with accounting principles generallyaccepted in Chile, which differ in certain respects from accounting principlesgenerally accepted in the United States of America (see Note 22 to thefinancial statements). 

 

 

 

Rio de Janeiro, Brazil, January13, 2006

 

ERNST & YOUNG

Auditores Independentes S.S.

 

 
|   | /s/ Claudio Camargo |   |
|--------|---------------------|--------|
|   | Claudio Camargo     |   |
|   | Partner             |   |

 

 

F-9

----

 
|  | Praia de Botafogo, 300 - 13o andar

22250-040 - Rio de Janeiro, RJ, Brasil

  | Fone: (55)  (21) 2109-1400

Fax: (55)  (21) 2109-1600

homepage: www.ey.com.br |
|--|-----------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------|

 

**Report ofIndependent Registered Public Accounting Firm**

 

 

To the Board of Directors and Shareholders of

CIEN-Companhiade Interconexao Energetica

 

We have audited the accompanying balance sheetof CIEN-Companhia de InterconexaoEnergetica (the “Company”) as ofDecember 31, 2005, and the related statements of income, changes inshareholders' equity and cash flows for the three-month period ended December31, 2005. These financial statements are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these financialstatements based on our audit. 

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the financialposition of CIEN-Companhia de InterconexaoEnergetica at December 31, 2005,and the results of its operations and its cash flows for the three-month periodended December 31, 2005 in conformity with accounting principles generallyaccepted in Chile, which differ in certain respects from accounting principlesgenerally accepted in the United States of America (see Note 24 to thefinancial statements). 

 

 

 

Rio de Janeiro, Brazil, January13, 2006

 

ERNST & YOUNG

Auditores Independentes S.S.

 

 
|   | /s/ Claudio Camargo |   |
|--------|---------------------|--------|
|   | Claudio Camargo     |   |
|   | Partner             |   |

 

 

F-10

----

 

**Endesa-Chile and SubsidiariesAudited Consolidated BalanceSheetsTranslation of financial statements originally issued in Spanish-See Note 2 (a)(Restated for general price-level changes and expressed in thousands ofconstantChilean pesos as of December 31, 2005, except as stated)**

 
| ** **                                     | ** ** | ** ** | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------|------------|------------|------------|------------------------|------------|
| ** **                                     | ** ** | **Note**   | ** ** | **2004**               | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | **ThCh$**              | ** ** | **ThCh$** | ** ** | **ThUS$** | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | ** **             | ** ** | ** ** | ** ** | **(Note 2  (b))** | ** ** |
| **Assets**                                     |       |       |       |                   |       |   |   |   |   |
| ** **                                     |       |       |       |                   |       |   |   |   |   |
| **Current assets:**                            |       |       |       |                   |       |   |   |   |   |
| Cash                                           |       |       |       | 30,705,233             |       | 10,023,121 |   | 19,557 |   |
| Time deposits                                  |       | 4          |       | 193,370,032            |       | 60,468,287 |   | 117,987 |   |
| Accounts receivable, net                       |       | 5a         |       | 109,251,776            |       | 99,540,291 |   | 194,225 |   |
| Notes receivable, net                          |       | 5a         |       | 215,030                |       | — |   | — |   |
| Other accounts receivable, net                 |       | 5a         |       | 37,301,733             |       | 36,655,265 |   | 71,522 |   |
| Accounts receivable from related companies     |       | 6a         |       | 152,352,416            |       | 35,383,865 |   | 69,042 |   |
| Inventories, net                               |       |       |       | 14,184,246             |       | 22,035,810 |   | 42,998 |   |
| Recoverable taxes                              |       | 7a         |       | 5,110,247              |       | 5,640,765 |   | 11,006 |   |
| Prepaid expenses                               |       |       |       | 3,331,943              |       | 1,611,971 |   | 3,145 |   |
| Deferred income taxes, net                     |       | 7b         |       | 3,026,164              |       | 2,481,567 |   | 4,842 |   |
| Other current assets                           |       | 8          |       | 15,487,621             |       | 11,093,665 |   | 21,646 |   |
| Total current assets                           |       |       |       | 564,336,441            |       | 284,934,607 |   | 555,970 |   |
|                                           |       |       |       |                   |       |   |   |   |   |
| **Property, plant and equipment, net**         |       | 9          |       | 4,635,648,985          |       | 3,910,099,818 |   | 7,629,463 |   |
|                                           |       |       |       |                   |       |   |   |   |   |
| **Other assets:**                              |       |       |       |                   |       |   |   |   |   |
| Investments in related companies               |       | 10a        |       | 173,065,074            |       | 470,061,843 |   | 917,193 |   |
| Investments in other companies                 |       | 11         |       | 23,515,125             |       | 19,061,728 |   | 37,194 |   |
| Long-term receivables, net                     |       | 5a         |       | 36,288,858             |       | 26,436,799 |   | 51,584 |   |
| Goodwill, net                                  |       | 12a        |       | 20,314,911             |       | 17,026,593 |   | 33,223 |   |
| Negative goodwill, net                         |       | 12b        |       | (57,954,082            | )          | (36,123,677 | ) | (70,485 | ) |
| Accounts receivable from related companies     |       | 6a         |       | 346,507                |       | 89,827,361 |   | 175,272 |   |
| Other intangibles                              |       | 13         |       | 29,087,073             |       | 25,899,007 |   | 50,535 |   |
| Accumulated amortization of other  intangibles |       | 13         |       | (8,669,907             | )          | (8,900,318 | ) | (17,366 | ) |
| Other assets                                   |       | 14         |       | 93,116,117             |       | 76,147,107 |   | 148,580 |   |
| Total other assets                             |       |       |       | 309,109,676            |       | 679,436,443 |   | 1,325,730 |   |
| Total assets                                   |       |       |       | 5,509,095,102          |       | 4,874,470,868 |   | 9,511,163 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-11

----

 

**Endesa-Chile and SubsidiariesAudited Consolidated Balance SheetsTranslation of financial statements originally issued in Spanish-See Note 2 (a)(Restated for general price-level changes and expressed in thousands ofconstantChilean pesos as of December 31, 2005, except as stated)**

 
| ** **                                                                 | ** ** | ** ** | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|
| ** **                                                                 | ** ** | **Note**   | ** ** | **2004**               | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                                                 | ** ** | ** ** | ** ** | **ThCh$**              | ** ** | **ThCh$** | ** ** | **ThUS$** | ** ** |
| ** **                                                                 | ** ** | ** ** | ** ** | ** **             | ** ** | ** ** | ** ** | **(Note 2  (b))** | ** ** |
| **Liabilities and Shareholders’ equity**                              |       |       |       |                   |       |   |   |   |   |
|                                                                       |       |       |       |                   |       |   |   |   |   |
| **Current liabilities:**                                                   |       |       |       |                   |       |   |   |   |   |
| Short-term debt due to banks and financial  institutions                   |       | 15a        |       | 99,431,137             |       | 12,331,856 |   | 24,062 |   |
| Current portion of long-term debt due to  banks and financial institutions |       | 15b        |       | 89,294,090             |       | 28,886,740 |   | 56,364 |   |
| Current portion of bonds payable                                           |       | 16a        |       | 79,422,478             |       | 303,447,838 |   | 592,093 |   |
| Current portion of long-term notes payable                                 |       | 16d        |       | 25,631,739             |       | 27,704,213 |   | 54,057 |   |
| Dividends payable                                                          |       |       |       | 184,094                |       | 4,690,151 |   | 9,152 |   |
| Accounts payable                                                           |       |       |       | 83,963,370             |       | 55,935,840 |   | 109,143 |   |
| Miscellaneous payables                                                     |       |       |       | 17,967,094             |       | 26,609,800 |   | 51,922 |   |
| Accounts payable to related companies                                      |       | 6b         |       | 6,613,248              |       | 7,170,361 |   | 13,991 |   |
| Accrued liabilities                                                        |       | 17         |       | 15,773,485             |       | 22,846,383 |   | 44,578 |   |
| Withholdings                                                               |       |       |       | 11,227,099             |       | 8,053,590 |   | 15,714 |   |
| Income taxes payable                                                       |       | 7a         |       | 14,026,590             |       | 16,185,528 |   | 31,582 |   |
| Deferred income                                                            |       |       |       | 226,096                |       | 677,523 |   | 1,322 |   |
| Other current liabilities                                                  |       |       |       | 1,470,691              |       | 13,224,700 |   | 25,804 |   |
| Total current liabilities                                                  |       |       |       | 445,231,211            |       | 527,764,523 |   | 1,029,784 |   |
| **Long-term liabilities:**                                                 |       |       |       |                   |       |   |   |   |   |
| Long-term debt due to banks and financial  institutions                    |       | 15c        |       | 260,879,515            |       | 162,614,559 |   | 317,297 |   |
| Bonds payable                                                              |       | 16b        |       | 1,746,420,115          |       | 1,393,913,093 |   | 2,719,830 |   |
| Long-term notes payable.                                                   |       | 16d        |       | 97,066,000             |       | 52,690,125 |   | 102,810 |   |
| Miscellaneous payables                                                     |       |       |       | 39,380,588             |       | 29,469,988 |   | 57,502 |   |
| Accounts payable to related companies                                      |       | 6b         |       | 52,980                 |       | — |   | — |   |
| Accrued liabilities                                                        |       | 17         |       | 39,019,396             |       | 28,567,927 |   | 55,742 |   |
| Deferred income taxes                                                      |       | 7b         |       | 77,240,709             |       | 99,474,980 |   | 194,098 |   |
| Other long-term liabilities                                                |       |       |       | 10,448,892             |       | 3,817,146 |   | 7,448 |   |
| Total long-term liabilities                                                |       |       |       | 2,270,508,195          |       | 1,770,547,818 |   | 3,454,727 |   |
| **Commitments and contingencies**                                          |       | 26         |       |                   |       |   |   |   |   |
| **Minority interest**                                                      |       | 18a        |       | 1,167,977,388          |       | 933,899,698 |   | 1,822,245 |   |
| **Shareholders’ equity:**                                             |       | 19         |       |                   |       |   |   |   |   |
| Paid-in capital, no par value                                              |       |       |       | 1,115,200,845          |       | 1,115,200,845 |   | 2,176,002 |   |
| Additional paid-in capita—share premium                               |       |       |       | 218,760,487            |       | 218,760,487 |   | 426,850 |   |
| Other reserves                                                             |       | 19d        |       | 24,073,594             |       | (34,508,449 | ) | (67,335 | ) |
| Retained earnings                                                          |       |       |       | 180,538,231            |       | 232,182,953 |   | 453,040 |   |
| Net income                                                                 |       |       |       | 86,805,151             |       | 110,622,993 |   | 215,850 |   |
| Total Shareholders’ equity                                            |       |       |       | 1,625,378,308          |       | 1,642,258,829 |   | 3,204,407 |   |
| Total liabilities and Shareholders’ equity                            |       |       |       | 5,509,095,102          |       | 4,874,470,868 |   | 9,511,163 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-12

----

 

**Endesa-Chile and SubsidiariesAudited ConsolidatedStatements of IncomeTranslation of financial statements originally issued in Spanish-See Note 2 (a)(Restated for general price-level changes and expressed in thousands ofconstantChilean pesos as of December 31, 2005, except as stated)**

 
| ** **                                           | ** ** | ** ** | ** ** | **For the year ended December 31,** | ** ** |
|------------------------------------------------------|------------|------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **Note**   | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | ** ** | ** ** | **ThCh$**                           | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThUS$** | ** ** |
| ** **                                           | ** ** | ** ** | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | **(Note 2 (b))** | ** ** |
| **Operating income:**                                |       |       |       |                                |       |   |   |   |   |   |   |
| ** **                                           |       |       |       |                                |       |   |   |   |   |   |   |
| Sales                                                |       |       |       | 977,246,817                         |       | 1,069,837,919 |   | 1,123,038,869 |   | 2,191,295 |   |
|                                                 |       |       |       |                                |       |   |   |   |   |   |   |
| Cost of sales                                        |       |       |       | (584,519,346                        | )          | (651,842,317 | ) | (689,599,392 | ) | (1,345,560 | ) |
|                                                 |       |       |       |                                |       |   |   |   |   |   |   |
| Gross profit                                         |       |       |       | 392,727,471                         |       | 417,995,602 |   | 433,439,477 |   | 845,735 |   |
|                                                 |       |       |       |                                |       |   |   |   |   |   |   |
| Administrative and Selling expenses                  |       |       |       | (33,262,749                         | )          | (35,685,526 | ) | (38,577,506 | ) | (75,273 | ) |
|                                                 |       |       |       |                                |       |   |   |   |   |   |   |
| Operating income                                     |       |       |       | 359,464,722                         |       | 382,310,076 |   | 394,861,971 |   | 770,462 |   |
| ** **                                           |       |       |       |                                |       |   |   |   |   |   |   |
| **Non-operating income and expense:**                |       |       |       |                                |       |   |   |   |   |   |   |
| Interest income                                      |       |       |       | 16,207,226                          |       | 15,448,952 |   | 15,551,769 |   | 30,345 |   |
| Equity participation in income  of related companies |       | 10a        |       | 18,841,176                          |       | 19,983,781 |   | 21,374,020 |   | 41,705 |   |
| Other non-operating income                           |       | 20a        |       | 47,332,392                          |       | 53,086,549 |   | 33,280,139 |   | 64,937 |   |
| Equity participation in losses  of related companies |       | 10a        |       | (396,278                            | )          | (89,449 | ) | (7,804,518 | ) | (15,228 | ) |
| Goodwill amortization                                |       | 12a        |       | (1,638,623                          | )          | (1,516,193 | ) | (1,366,376 | ) | (2,666 | ) |
| Interest expense                                     |       |       |       | (216,772,199                        | )          | (199,490,197 | ) | (178,794,037 | ) | (348,867 | ) |
| Other non-operating expenses                         |       | 20b        |       | (63,779,969                         | )          | (82,140,231 | ) | (53,586,357 | ) | (104,559 | ) |
| Price-level restatement, net                         |       | 21         |       | 610,518                             |       | 2,290,950 |   | 1,317,956 |   | 2,572 |   |
| Foreign currency translation,  net                   |       | 22         |       | 9,510,338                           |       | 21,372,999 |   | 14,900,955 |   | 29,075 |   |
| Non-operating loss                                   |       |       |       | (190,085,419                        | )          | (171,052,839 | ) | (155,126,449 | ) | (302,686 | ) |
| ** **                                           |       |       |       |                                |       |   |   |   |   |   |   |
| Income before income taxes                           |       |       |       | 169,379,303                         |       | 211,257,237 |   | 239,735,522 |   | 467,776 |   |
| Income taxes                                         |       | 7c         |       | (29,072,786                         | )          | (96,790,159 | ) | (91,954,386 | ) | (179,423 | ) |
| Income before minority interest                      |       |       |       | 140,306,517                         |       | 114,467,078 |   | 147,781,136 |   | 288,353 |   |
| Minority interest                                    |       | 18b        |       | (73,893,845                         | )          | (44,343,158 | ) | (52,468,572 | ) | (102,378 | ) |
| Income before amortization of negative  goodwill     |       |       |       | 66,412,672                          |       | 70,123,920 |   | 95,312,564 |   | 185,975 |   |
| Amortization of negative  goodwill                   |       | 12b        |       | 16,554,544                          |       | 16,681,231 |   | 15,310,429 |   | 29,875 |   |
| Net income                                           |       |       |       | 82,967,216                          |       | 86,805,151 |   | 110,622,993 |   | 215,850 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-13

----

 

**Endesa-Chile and SubsidiariesAudited ConsolidatedStatements of Shareholders’ EquityTranslation of financial statements originally issued in Spanish-See Note 2 (a)(Restated for general price-level changes and expressed in thousands ofconstantChilean pesos as of December 31, 2005, except as stated)**

 
| ** **                                         | ** ** | **Number  of  shares** | ** ** | **Paid-in  capital** | ** ** | **Additional  paid-in capital** | ** ** | **Other  reserves** | ** ** | **Retained  earnings** | ** ** | **Net  income** | ** ** | **Total**     | ** ** |
|----------------------------------------------------|------------|------------------------|------------|----------------------|------------|---------------------------------|------------|---------------------|------------|------------------------|------------|-----------------|------------|---------------|------------|
| ** **                                         | ** ** | **(In  thousands)**    | ** ** | **ThCh$**            | ** ** | **ThCh$**                       | ** ** | **ThCh$**           | ** ** | **ThCh$**              | ** ** | **ThCh$**       | ** ** | **ThCh$**     | ** ** |
|                                               |       |                   |       |                 |       |                            |       |                |       |                   |       |            |       |          |       |
| As of January 1,  2003                             |       | 8,201,755              |       | 1,039,795,887        |       | 203,968,868                     |       | 71,330,030          |       | 124,859,591            |       | (9,319,056      | )          | 1,430,635,320 |       |
| Reclassification  of prior year net loss           |       | —                 |       | —               |       | —                          |       | 7,469,939           |       | (16,788,995            | )          | 9,319,056       |       | —        |       |
| Price-level  restatement of capital                |       | —                 |       | 10,397,959           |       | 2,039,689                       |       | 788,000             |       | 1,080,707              |       | —          |       | 14,306,355    |       |
| Income from  subsidiaries in the development stage |       | —                 |       | —               |       | —                          |       | 75,847              |       | —                 |       | —          |       | 75,847        |       |
| Cumulative  translation adjustment                 |       | —                 |       | —               |       | —                          |       | (30,479,394         | )          | —                 |       | —          |       | (30,479,394   | )          |
| Net Income                                         |       | —                 |       | —               |       | —                          |       | —              |       | —                 |       | 78,130,912      |       | 78,130,912    |       |
| As of December  31, 2003                           |       | 8,201,755              |       | 1,050,193,846        |       | 206,008,557                     |       | 49,184,422          |       | 109,151,303            |       | 78,130,912      |       | 1,492,669,040 |       |
| As of December  31, 2003 (1)                       |       | —                 |       | 1,115,200,845        |       | 218,760,487                     |       | 52,228,937          |       | 115,907,769            |       | 82,967,216      |       | 1,585,065,254 |       |
|                                               |       |                   |       |                 |       |                            |       |                |       |                   |       |            |       |          |       |
| As of January 1,  2004                             |       | 8,201,755              |       | 1,050,193,846        |       | 206,008,557                     |       | 49,184,422          |       | 109,151,303            |       | 78,130,912      |       | 1,492,669,040 |       |
| Reclassification  of prior year net income         |       | —                 |       | —               |       | —                          |       | —              |       | 78,130,912             |       | (78,130,912     | )          | —        |       |
| Price-level  restatement of capital                |       | —                 |       | 26,254,846           |       | 5,150,214                       |       | 1,187,406           |       | 4,158,338              |       | —          |       | 36,750,804    |       |
| Dividends                                          |       | —                 |       | —               |       | —                          |       | —              |       | (18,864,036            | )          | —          |       | (18,864,036   | )          |
| Income from  subsidiaries in the development stage |       | —                 |       | —               |       | —                          |       | (1,688,185          | )          | 1,688,185              |       | —          |       | —        |       |
| Cumulative  translation adjustment                 |       | —                 |       | —               |       | —                          |       | (25,446,583         | )          | —                 |       | —          |       | (25,446,583   | )          |
| Net income                                         |       | —                 |       | —               |       | —                          |       | —              |       | —                 |       | 83,788,756      |       | 83,788,756    |       |
| As of December  31, 2004                           |       | 8,201,755              |       | 1,076,448,692        |       | 211,158,771                     |       | 23,237,060          |       | 174,264,702            |       | 83,788,756      |       | 1,568,897,981 |       |
| As of December  31, 2004 (1)                       |       | —                 |       | 1,115,200,845        |       | 218,760,487                     |       | 24,073,594          |       | 180,538,231            |       | 86,805,151      |       | 1,625,378,308 |       |
|                                               |       |                   |       |                 |       |                            |       |                |       |                   |       |            |       |          |       |
| As of January 1,  2005                             |       | 8,201,755              |       | 1,076,448,692        |       | 211,158,771                     |       | 23,237,060          |       | 174,264,702            |       | 83,788,756      |       | 1,568,897,981 |       |
| Reclassification  of prior year net income         |       | —                 |       | —               |       | —                          |       | —              |       | 83,788,756             |       | (83,788,756     | )          | —        |       |
| Price-level  restatement of capital                |       | —                 |       | 38,752,153           |       | 7,601,716                       |       | 836,534             |       | 8,002,741              |       | —          |       | 55,193,144    |       |
| Dividends                                          |       | —                 |       | —               |       | —                          |       | —              |       | (33,873,246            | )          | —          |       | (33,873,246   | )          |
| Application of  Pooling of Interests Method (2)    |       | —                 |       | —               |       | —                          |       | (33,694,515         | )          | —                 |       | —          |       | (33,694,515   | )          |
| Cumulative  translation adjustment                 |       | —                 |       | —               |       | —                          |       | (24,887,528         | )          | —                 |       | —          |       | (24,887,528   | )          |
| Net income                                         |       | —                 |       | —               |       | —                          |       | —              |       | —                 |       | 110,622,993     |       | 110,622,993   |       |
| As of December  31, 2005                           |       | 8,201,755              |       | 1,115,200,845        |       | 218,760,487                     |       | (34,508,449         | )          | 232,182,953            |       | 110,622,993     |       | 1,642,258,829 |       |

 

----

(1)          Restated in thousands of constant Chilean pesosas of December 31, 2005

(2)           See Note10 (c) (iii.)

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-14

----

 

**Endesa-Chile and Subsidiaries**

**Audited Consolidated Statements ofCash Flows**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| ** **                                                                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                           | ** ** | **2003**                     | ** ** | **2004** | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                                                           | ** ** | **ThCh$**                    | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThUS$** | ** ** |
| ** **                                                                           | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **(Note 2 (b))** | ** ** |
| **Cash flows from operating activities:**                                            |       |                         |       |   |   |   |   |   |   |
| **Charges (credits) to income which do not  represent cash flows:**                  |       |                         |       |   |   |   |   |   |   |
| Net income                                                                           |       | 82,967,216                   |       | 86,805,151 |   | 110,622,993 |   | 215,850 |   |
| (Gain) loss on sales of property, plant and  equipment                               |       | 6,387,995                    |       | (6,531,831 | ) | (3,682,341 | ) | (7,185 | ) |
| (Gain) on sales of investments                                                       |       | (1,548,263                   | )          | — |   | — |   | — |   |
| (Gain) loss on sales of other assets                                                 |       | 424,215                      |       | (26,563 | ) | — |   | — |   |
| Depreciation                                                                         |       | 190,598,968                  |       | 176,938,746 |   | 170,472,022 |   | 332,628 |   |
| Amortization of intangibles                                                          |       | 1,740,369                    |       | 1,451,970 |   | 1,199,735 |   | 2,341 |   |
| Equity participation in income of related  companies                                 |       | (18,841,176                  | )          | (19,983,781 | ) | (21,374,020 | ) | (41,705 | ) |
| Equity participation in losses of related  companies                                 |       | 396,278                      |       | 89,449 |   | 7,804,518 |   | 15,228 |   |
| Amortization of goodwill                                                             |       | 1,638,623                    |       | 1,516,193 |   | 1,366,376 |   | 2,666 |   |
| Amortization of negative goodwill                                                    |       | (16,554,544                  | )          | (16,681,231 | ) | (15,310,429 | ) | (29,875 | ) |
| Price-level restatement, net                                                         |       | (610,518                     | )          | (2,290,950 | ) | (1,317,956 | ) | (2,572 | ) |
| Foreign currency translation, net                                                    |       | (9,510,338                   | )          | (21,372,999 | ) | (14,900,955 | ) | (29,075 | ) |
| Other credits to income which do not  represent cash flows                           |       | (20,339,830                  | )          | (6,560,248 | ) | (10,769,823 | ) | (21,014 | ) |
| Other charges to income which do not  represent cash flows                           |       | 33,540,196                   |       | 44,799,556 |   | 27,637,093 |   | 53,927 |   |
| **Changes in assets which affect cash flows:**                                       |       |                         |       |   |   |   |   |   |   |
| Increase in trade receivables                                                        |       | (70,110,380                  | )          | (8,049,183 | ) | (15,569,148 | ) | (30,379 | ) |
| Increase in inventory                                                                |       | (1,204,735                   | )          | (4,080,089 | ) | (9,019,254 | ) | (17,599 | ) |
| Decrease (increase) in other assets                                                  |       | 29,295,382                   |       | 31,186,734 |   | (5,097,898 | ) | (9,947 | ) |
| **Changes in liabilities which affect cash  flows:**                                 |       |                         |       |   |   |   |   |   |   |
| Increase (decrease) in accounts payable  associated with operating results           |       | 29,083,015                   |       | (44,388,383 | ) | (51,496,485 | ) | (100,481 | ) |
| Increase (decrease) in interest payable                                              |       | (3,947,238                   | )          | 8,094,440 |   | 1,582,565 |   | 3,088 |   |
| Increase (decrease) in income tax payable                                            |       | (15,939,146                  | )          | 10,765,767 |   | 34,104,925 |   | 66,546 |   |
| Increase (decrease) in other accounts  payable associated with non-operating results |       | (5,875,898                   | )          | (28,520,377 | ) | 40,160,815 |   | 78,363 |   |
| Net (decrease) increase in value added tax  and other accounts payable               |       | 11,924,747                   |       | 13,841,466 |   | (27,953,702 | ) | (54,544 | ) |
| Income attributable to minority interest                                             |       | 73,893,845                   |       | 44,343,158 |   | 52,468,572 |   | 102,378 |   |
| **Net cash flows provided by operating  activities**                                 |       | 297,408,783                  |       | 261,346,995 |   | 270,927,603 |   | 528,639 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-15

----

 

**Endesa-Chile and SubsidiariesAudited Consolidated Balance SheetsTranslation of financial statements originally issued in Spanish-See Note 2 (a)(Restated for general price-level changes and expressed in thousands ofconstantChilean pesos as of December 31, 2005, except as stated)**

 
| ** **                                                      | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                      | ** ** | **2003**                     | ** ** | **2004** | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **ThCh$**                    | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThUS$** | ** ** |
| ** **                                                      | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **(Note 2 (b))** | ** ** |
| **Cash flows from financing activities:**                       |       |                         |       |   |   |   |   |   |   |
| Proceeds from the issuance of debt                              |       | 211,790,812                  |       | 268,173,026 |   | 85,485,290 |   | 166,801 |   |
| Proceeds from bond issuances                                    |       | 639,172,703                  |       | 98,056,149 |   | 79,429,405 |   | 154,984 |   |
| Proceeds from loans obtained from related  companies            |       | —                       |       | 3,173,555 |   | 40,146,172 |   | 78,334 |   |
| Other sources of financing                                      |       | 6,719,260                    |       | 10,502,360 |   | — |   | — |   |
| Dividends paid                                                  |       | (38,611,638                  | )          | (76,491,208 | ) | (84,188,632 | ) | (164,271 | ) |
| Distributions of capital by foreign  subsidiaries               |       | (13,455,324                  | )          | (10,357,090 | ) | (80,954,328 | ) | (157,960 | ) |
| Payment of debt                                                 |       | (633,959,519                 | )          | (362,696,042 | ) | (318,541,982 | ) | (621,545 | ) |
| Payment of bonds                                                |       | (421,974,264                 | )          | (32,229,229 | ) | (45,836,728 | ) | (89,438 | ) |
| Payment of loans obtained from related  companies               |       | (25,423,019                  | )          | (3,258,095 | ) | (38,811,725 | ) | (75,730 | ) |
| Payment of bond issuance costs                                  |       | (6,033,071                   | )          | (491,910 | ) | — |   | — |   |
| Other disbursements for financing                               |       | (59,005,246                  | )          | (8,444,285 | ) | (3,791,094 | ) | (7,397 | ) |
| Net cash used in financing activities                           |       | (340,779,306                 | )          | (114,062,769 | ) | (367,063,622 | ) | (716,222 | ) |
| **Cash flows from investing activities:**                       |       |                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from sales of property, plant and  equipment           |       | 162,298,696                  |       | 13,891,619 |   | 4,228,257 |   | 8,250 |   |
| Payments received on loans to related  companies                |       | 45,786,689                   |       | 84,980,328 |   | 33,078,275 |   | 64,543 |   |
| Other receipts from investments                                 |       | 52,870,235                   |       | 42,035,037 |   | 6,458,987 |   | 12,603 |   |
| Additions to property, plant and equipment                      |       | (139,257,372                 | )          | (99,596,455 | ) | (58,780,329 | ) | (114,694 | ) |
| Long-term investments                                           |       | (3,172,117                   | )          | — |   | (15,119,259 | ) | (29,501 | ) |
| Sales of long-term investments                                  |       | —                       |       | 2,649,821 |   | — |   | — |   |
| Other loans granted to related companies                        |       | —                       |       | (117,437,789 | ) | (24,983,555 | ) | (48,748 | ) |
| Net cash provided by (used in) investing  activities            |       | 118,526,131                  |       | (73,477,439 | ) | (55,117,624 | ) | (107,547 | ) |
| Net cash flow for the year                                      |       | 75,155,608                   |       | 73,806,787 |   | (151,253,643 | ) | (295,129 | ) |
| Effect of price-level restatement on cash  and cash equivalents |       | (33,154,230                  | )          | (9,429,519 | ) | (5,535,271 | ) | (10,801 | ) |
| Net increase in cash and cash equivalents                       |       | 42,001,378                   |       | 64,377,268 |   | (156,788,914 | ) | (305,930 | ) |
| Cash and cash equivalents—Beginning of year                |       | 131,775,030                  |       | 173,776,408 |   | 238,153,676 |   | 464,690 |   |
| Cash and cash equivalents—End of year                      |       | 173,776,408                  |       | 238,153,676 |   | 81,364,762 |   | 158,760 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-16

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated Financial Statements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**1.****                 ****Description of Business:**

 

Empresa Nacional de Electricidad S.A. (“Endesa-Chile” or the “Company”)is a power generation company domiciled in Chile. It is a publicly tradedcompany, regulated by the Chilean Superintendence of Securities and Insurance(Superintendencia de Valores y Seguros or “SVS”) as well as by the UnitedStates Securities and Exchange Commission (“SEC”) since issuing AmericanDepositary Receipts (“ADRs”) in 1994.

 

As of December 31, 2005 the Company’s only subsidiary that isregulated by the SVS is Empresa Eléctrica Pehuenche S.A. (“Pehuenche S.A.”).

 

The Company is a subsidiary of Enersis S.A., which held 59.98% of theshares as of December 31, 2005.

 

**2.****                 ****Summary of Significant Accounting Policies:**

 

a.                   General:

 

The consolidated financialstatements of the Company have been prepared in accordance with accountingprinciples generally accepted in Chile and the regulations established by theSVS (collectively “Chilean GAAP”). Certain accounting practices applied by theCompany that conform with accounting principles generally accepted in Chile donot conform with accounting principles generally accepted in the United States(“US GAAP”) or International Financial Reporting Standards (“IFRS”). Certainamounts in the prior years’ financial statements have been reclassified toconform to the current year’s presentation.

 

For the convenience of the reader, these financial statements and theiraccompanying notes have been translated from Spanish to English.

 

Thepreparation of financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities as of the date of thefinancial statements, and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from those estimates.

 

In certain cases generally accepted accountingprinciples require that assets or liabilities be recorded or disclosed at theirfair values. The fair value is the amount at which an asset could be bought orsold or the amount at which a liability could be incurred or settled in a currenttransaction between willing parties, other than in a forced or liquidation sale.Where available, quoted market prices in active markets have been used as thebasis for the measurement; however, where quoted market prices in activemarkets are not available, the Company has estimated such values based on thebest available information, including using modeling and other valuationtechniques.

 

Theaccompanying financial statements reflect the consolidated results ofoperations of Endesa-Chile and its subsidiaries. All significant intercompanytransactions have been eliminated in consolidation. Investments in companies inthe development stage are accounted for using the equity method, except thatincome or losses are included directly in equity instead of being reflected inthe Company’s consolidated statement of income. The Company consolidates thefinancial statements of companies in which it controls over 50% of the votingshares, provided that there are no substantive minority participating rightsthat prevent control, detailed as follows:

 

F-17

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**2.****                 ****Summary of Significant Accounting Policies, continued:**

 
| ** **                                                         | ** ** | **Percentage participation in voting rights as of December 31,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| **Company name**                                                   | ** ** | **2003**                                                         | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                         | ** ** | **Total**                                                        | ** ** | **Total** | ** ** | **Direct** | ** ** | **Indirect** | ** ** | **Total** | ** ** |
| Enigesa S.A. (Chile)                                               |       | 100.00                                                           |       | 100.00 |   | 99.51 |   | 0.49 |   | 100.00 |   |
| Ingendesa S.A. (1) (Chile)                                         |       | 97.64                                                            |       | 97.64 |   | 98.75 |   | 1.25 |   | 100.00 |   |
| Pehuenche S.A. (Chile)                                             |       | 92.65                                                            |       | 92.65 |   | 92.65 |   | — |   | 92.65 |   |
| Endesa Argentina S.A (2) (Argentina)                               |       | 99.99                                                            |       | 99.99 |   | 97.99 |   | 2.00 |   | 99.99 |   |
| Endesa-Chile Internacional (Chile)                                 |       | 100.00                                                           |       | 100.00 |   | 100.00 |   | — |   | 100.00 |   |
| Pangue S.A. (Chile)                                                |       | 94.99                                                            |       | 94.99 |   | 94.97 |   | 0.02 |   | 94.99 |   |
| Hidroinvest S.A. (Argentina)                                       |       | 69.93                                                            |       | 69.93 |   | — |   | 69.93 |   | 69.93 |   |
| Hidroeléctrica El Chocón S.A. (Argentina)                |       | 65.19                                                            |       | 65.19 |   | — |   | 65.19 |   | 65.19 |   |
| Endesa Costanera S.A. (Argentina)                                  |       | 64.26                                                            |       | 64.26 |   | 12.33 |   | 51.93 |   | 64.26 |   |
| Endesa Brasil Participacoes Ltda. (Brasil)                         |       | 100.00                                                           |       | 100.00 |   | 5.00 |   | 95.00 |   | 100.00 |   |
| Túnel El Melón S.A. (Chile)                              |       | 99.95                                                            |       | 99.95 |   | 99.95 |   | — |   | 99.95 |   |
| Compañía Eléctrica Cono Sur S.A. (Chile)            |       | 100.00                                                           |       | 100.00 |   | 100.00 |   | — |   | 100.00 |   |
| Central Hidroeléctrica Betania S.A.  (Colombia)               |       | 85.62                                                            |       | 85.62 |   | 0.44 |   | 85.18 |   | 85.62 |   |
| Endesa de Colombia S.A. (3) (Colombia)                             |       | 100.00                                                           |       | — |   | — |   | — |   | — |   |
| Lajas Inversora S.A. (4) (Brasil)                                  |       | 100.00                                                           |       | 100.00 |   | — |   | — |   | — |   |
| Cachoeira Dourada S.A. (1), (5) (Brasil)                           |       | 99.61                                                            |       | 99.61 |   | — |   | — |   | — |   |
| Capital de Energía S.A. (6) (Colombia)                        |       | 50.90                                                            |       | 51.00 |   | 0.05 |   | 50.95 |   | 51.00 |   |
| Emgesa S.A (7) (Chile)                                             |       | 48.48                                                            |       | 48.48 |   | — |   | 48.48 |   | 48.48 |   |
| Edegel S.A. (Perú)                                            |       | 63.56                                                            |       | 63.56 |   | — |   | 63.56 |   | 63.56 |   |
| Generandes Perú S.A. (Perú)                              |       | 59.63                                                            |       | 59.63 |   | — |   | 59.63 |   | 59.63 |   |
| Compañía Eléctrica San Isidro S.A. (1),(8)  (Chile) |       | 100.00                                                           |       | 100.00 |   | 50.00 |   | 50.00 |   | 100.00 |   |
| Compañía Eléctrica Tarapacá S.A. (Chile)       |       | 100.00                                                           |       | 100.00 |   | 99.94 |   | 0.06 |   | 100.00 |   |
| Inversiones Endesa Norte S.A. (Chile)                              |       | 100.00                                                           |       | 100.00 |   | 99.99 |   | 0.01 |   | 100.00 |   |
| Ingendesa Do Brasil Limitada (Brasil)                              |       | 100.00                                                           |       | 100.00 |   | — |   | 100.00 |   | 100.00 |   |
| Endesa Eco S.A.  (Chile) (9)                                       |       | —                                                           |       | — |   | 99.99 |   | 0.01 |   | 100.00 |   |

     

----

| (1) | See  note 10 (c) (iv.).                                                                                                                                                                                                                                                                                                                                                                                      |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | On  November 17, 2004, the Company sold 492,920 shares (2% of its participation)  of this company to Enigesa S.A.                                                                                                                                                                                                                                                                                            |
| (3) | Endesa  de Colombia S.A., which held 8.91% of Central Hidroeléctrica Betania S.A.,  was liquidated on December 17, 2004. As a result of this transaction  Endesa-Chile (individual legal entity) and Compañía Eléctrica Conosur S.A.,  who owned shares of Endesa de Colombia S.A., acquired additional  participation in Central Hidroeléctrica Betania S.A.                       |
| (4) | See  note 10 (f) (ii.).                                                                                                                                                                                                                                                                                                                                                                                      |
| (5) | Subsequent to October 1, 2005, the Company’s subsidiary Cachoeira  Dourada S.A. was not included in the consolidated financial statements of  Endesa Chile any more due to the restructuring process of the Brazilian  operations (see Note 10 (c) (iii.)). On the following page, a pro-forma  balance sheet of Endesa Chile shows the 2004 effects if Cachoeira Dourada had  never been consolidated. |
| (6) | In  2004 as the result of the review of ownership related to shareholdings in  Capital de Energía S.A., the Company determined that its participation is  0.1% greater. The increase in participation of ThCh$224,549 was recorded in the  income statement for the year ended December 31, 2004.                                                                                                       |
| (7) | Endesa  Chile exercises control over this company pursuant to a shareholders  agreement.                                                                                                                                                                                                                                                                                                                     |
| (8) | Endesa-Chile  owns 100% of the class A shares of Compañía Eléctrica San Isidro, which  composes 50% share capital of this company and are the only shares with  voting rights.                                                                                                                                                                                                                |
| (9) | See  Note 10 (b) (i.).                                                                                                                                                                                                                                                                                                                                                                                       |

 

F-18

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**2.****                 ****Summary of Significant Accounting Policies, continued:**

 

Unaudited Pro-Forma Balance Sheet of Endesa-Chile had Cachoeira Dourada S.A.not been consolidated at December 31, 2004:

 
| ** **                                      | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **2004**               | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **ThCh$**              | ** ** | **ThCh$** | ** ** |
| ** **                                      | ** ** | **Pro-Forma**          | ** ** | **Actual** | ** ** |
| ** **                                      | ** ** | **(unaudited)**        | ** ** | ** ** | ** ** |
| **Assets**                                      |       |                   |       |   |   |
|                                            |       |                   |       |   |   |
| Total current assets                            |       | 552,132,096            |       | 284,934,607 |   |
| Total fixed assets, net                         |       | 4,280,072,318          |       | 3,910,099,818 |   |
| Total other assets                              |       | 655,184,731            |       | 679,436,443 |   |
| Total assets                                    |       | 5,487,389,145          |       | 4,874,470,868 |   |
|                                            |       |                   |       |   |   |
| **Liabilities**                                 |       |                   |       |   |   |
|                                            |       |                   |       |   |   |
| Total current liabilities                       |       | 437,311,088            |       | 527,764,523 |   |
| Total non-current liabilities                   |       | 2,258,196,038          |       | 1,770,547,818 |   |
| Total liabilities                               |       | 2,695,507,126          |       | 2,298,312,341 |   |
|                                            |       |                   |       |   |   |
| Minority Interest                               |       | 1,166,503,711          |       | 933,899,698 |   |
|                                            |       |                   |       |   |   |
| Total Shareholders’ equity                 |       | 1,625,378,308          |       | 1,642,258,829 |   |
| Total liabilities and shareholders’ equity |       | 5,487,389,145          |       | 4,874,470,868 |   |

 

The participation in votingrights is equal to economic participation in all subsidiaries apart from thosepresented in the following table. Economic interest of the Company in asubsidiary or related company is calculated by multiplying the percentageownership interest of the Company in a directly held subsidiary or relatedcompany by the percentage ownership interest of any entity in the chain ofownership of such ultimate subsidiary or related company. Economicparticipation is the Company’s share in earnings or losses of the subsidiary,which is not always equal to the Company’s voting interest.

 
| ** **                              | ** ** | **Percentage of economic participation as of December 31,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                              | ** ** | **2003**                                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **%**                                                       | ** ** | **%** | ** ** | **%** | ** ** |
|                                    |       |                                                        |       |   |   |   |   |
| Lajas Inversora S.A (1)                 |       | 92.88                                                       |       | 92.88 |   | — |   |
| Cachoeira Dourada S.A. (2)              |       | 92.51                                                       |       | 92.51 |   | — |   |
| Emgesa S.A.                             |       | 22.36                                                       |       | 22.36 |   | 22.36 |   |
| Edegel S.A.                             |       | 37.90                                                       |       | 37.90 |   | 37.90 |   |
| Capital de Energía S.A.            |       | 43.58                                                       |       | 43.68 |   | 43.59 |   |
| Hidroeléctrica El Chocón S.A. |       | 47.45                                                       |       | 47.45 |   | 47.45 |   |

 

----

(1)          See note 10 (f)(i.).

(2)          See note 10 (c)(iii.).

 

F-19

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**2.****                 ****Summary of Significant Accounting Policies, continued:**

 

b)                 Constant currencyrestatement:

 

The cumulative inflation rate in Chile as measured by theChilean Consumer Price Index (“CPI”) for the three-year period ended December31, 2005 was approximately 7.4%.

 

Chilean GAAP requires that the financial statements berestated to reflect the full effects of changes in the purchasing power of theChilean peso on the financial position and results of operations of reportingentities. The method described below is based on a model that enablescalculation of net inflation gains or losses caused by monetary assets andliabilities exposed to changes in the purchasing power of local currency. Themodel prescribes that the historical cost of all non-monetary accounts berestated for general price-level changes between the date of origin of eachitem and the year-end.

 

Thefinancial statements of the Company have been price-level restated in order toreflect the effects of the changes in the purchasing power of the Chileancurrency during each year. All non-monetary assets and liabilities, all equityaccounts and income statement accounts have been restated to reflect thechanges in the CPI from the date they were acquired or incurred to year-end(see also Note 21).

 

Theresulting gain or loss included in net income reflects the effects of Chileaninflation on the monetary assets and liabilities held by the Company.

 

Therestatements were calculated using the official consumer price index of theNational Institute of Statistics and based on the “prior-month rule,” in whichthe inflation adjustments are based on the CPI at the close of the monthpreceding the close of the respective period or transaction. This index isconsidered by the business community, the accounting profession and the Chileangovernment to be the index that most closely complies with the technicalrequirement to reflect the variation in the general level of prices in Chile,and consequently it is widely used for financial reporting purposes.

 

Thevalues of the Chilean consumer price indices used to reflect the effects of thechanges in the purchasing power of the Chilean peso (“price-level restatement”)are as follows:

 
| ** **         | ** ** | **Index** | ** ** | **Change over Previous  November 30,** | ** ** |
|--------------------|------------|-----------|------------|----------------------------------------|------------|
|               |       |      |       |                                   |       |
| November 30,  2003 |       | 100.00    |       | 1.0                                    | %          |
| November 30,  2004 |       | 102.48    |       | 2.5                                    | %          |
| November 30,  2005 |       | 106.19    |       | 3.6                                    | %          |

 

By wayof comparison, the actual values of the Chilean consumer price indices as ofthe balance sheet dates are as follows:

 
| ** **               | ** ** | **Index** | ** ** | **Change over Previous  December 31,** | ** ** |
|--------------------------|------------|-----------|------------|----------------------------------------|------------|
|                     |       |      |       |                                   |       |
| December 31,  2003  |       | 100.00    |       | 1.1                                    | %          |
| December 31,  2004  |       | 102.42    |       | 2.4                                    | %          |
| December 31,  2005  |       | 106.18    |       | 3.7                                    | %          |

 

F-20

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**2.****                 ****Summary of Significant Accounting Policies, continued:**

 

Theabove-mentioned price-level restatements do not purport to represent appraisalor replacement values and are only intended to restate all non-monetaryfinancial statement components in terms of local currency of a singlepurchasing power and to include in net income or loss for each year the gain orloss in purchasing power arising from the holding of monetary assets andliabilities exposed to the effects of inflation.

 

*Index-linkedassets and liabilities*

 

Assetsand liabilities that are denominated in index-linked units of account arestated at the year-end values of the respective units of account. The principalindex-linked unit used in Chile is the *Unidad de Fomento*(“UF”), which is adjusted daily to reflect the changes in Chile’s CPI. Certainof the Company’s investments are linked to the UF. As the Company’s indexedliabilities exceed its indexed assets, the increase in the index results in anet loss. Values for the UF are as follows (historical Chilean pesos per UF):

 
| ** **         | ** ** | **Ch$**   | ** ** |
|--------------------|------------|-----------|------------|
|               |       |      |       |
| December 31,  2003 |       | 16,920.00 |       |
| December 31,  2004 |       | 17,317.05 |       |
| December 31,  2005 |       | 17,974.81 |       |

 

*Comparativefinancial statements*

 

Forcomparative purposes, the historical December 31, 2003 and 2004 consolidatedfinancial statements and their accompanying notes have been presented inconstant Chilean pesos as of December 31, 2005. Amounts previously presented inconstant Chilean pesos as of each balance sheet date have been adjusted by thepercentage changes in the CPI to December 31, 2005 as follows:

 
| **Year**   | ** ** | **Change in Index** | ** ** |
|------------|------------|---------------------|------------|
| ** ** | ** ** | ** **          | ** ** |
| 2003       |       | 6.2                 | % (1)      |
| 2004       |       | 3.6                 | % (2)      |

 

----

(1) Equivalentto the amounts for 2003 multiplied by the change in the CPI for 2004, then bythe change in the CPI for 2005.

(2) Equivalentto the amounts for 2004 multiplied by the change in the CPI for 2005.

 

This updatingdoes not change the prior years’ statements or information in any way except toupdate the amounts to constant Chilean pesos of similar purchasing power.

 

*Conveniencetranslation to US dollars*

 

Thefinancial statements are stated in Chilean pesos. The translations of Chileanpesos into US dollars are included solely for the convenience of the reader,using the observed exchange rate reported by the Chilean Central Bank as ofDecember 31, 2005 of Ch$ 512.50 for US$ 1.00. The convenience translations shouldnot be construed as representations that the Chilean peso amounts have been,could have been, or could in the future be, converted into US dollars at thisor any other exchange rate.

 

F-21

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**2.****                 ****Summary of Significant Accounting Policies, continued:**

 

c)                  Assets andliabilities denominated in foreign currencies:

 

Assetsand liabilities denominated in foreign currencies are detailed in Note 28. Theseamounts have been stated at the observed rates of exchange reported by theCentral Bank of Chile as of each year-end as follows:

 
| **Currency**                    | ** ** | **Symbol used** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------------|------------|-----------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                      | ** ** | ** **      | ** ** | **Ch$**  | ** ** | **Ch$**  | ** ** | **Ch$**  | ** ** |
| United States dollar (Observed) |       | US$             |       | 593.80   |       | 557.40   |       | 512.50   |       |
| British pound sterling          |       | £          |       | 1,056.21 |       | 1,073.37 |       | 880.43   |       |
| Colombian peso                  |       | $Col            |       | 0.21     |       | 0.23     |       | 0.22     |       |
| New Peruvian sol                |       | Soles           |       | 171.62   |       | 169.84   |       | 149.42   |       |
| Brazilian real                  |       | Rs              |       | 205.52   |       | 209.99   |       | 219.02   |       |
| Japanese yen                    |       | ¥          |       | 5.55     |       | 5.41     |       | 4.34     |       |
| Euro                            |       | €          |       | 744.95   |       | 760.13   |       | 606.08   |       |
| Argentine peso                  |       | $Arg            |       | 200.61   |       | 187.65   |       | 169.14   |       |

 
| **Index**              | ** ** | **Symbol used** | ** ** | **2003**  | ** ** | **2004**  | ** ** | **2005**  | ** ** |
|------------------------|------------|-----------------|------------|-----------|------------|-----------|------------|-----------|------------|
| ** **             | ** ** | ** **      | ** ** | **Ch$**   | ** ** | **Ch$**   | ** ** | **Ch$**   | ** ** |
| Unidad de Fomento (UF) |       | UF              |       | 16,920.00 |       | 17,317.05 |       | 17,974.81 |       |

 

F-22

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**2.****                 ****Summary of Significant Accounting Policies, continued:**

 

d)                 Time deposits andMarketable securities:

 

Timedeposits are presented at cost plus accrued interest and UF indexationadjustments, as applicable. Marketable securities consist primarily of mutualfunds and are stated at market value.

 

e)                  Accounts receivableand Allowance for doubtful accounts:

 

Accountsreceivable are classified as current or long-term, depending on theircollection terms. Current and long-term trade accounts receivable, notesreceivable and other receivables are presented net of allowances for doubtfulaccounts (see Note 5). The Company establishes its allowance for doubtfulaccounts based on the aging of the accounts and prior experience with specificaccounts. Long-term receivables bear an immaterial imputed interest.

 

f)                    Inventories:

 

Inventoriesprimarily include spare parts and fuels for the generation of electricity andare valued at the lower of price-level restated average cost or net realizablevalue. Inventories are presented net of a provision for obsolescence.

 

g)                 Property, plant andequipment:

 

Until 1980, property, plant and equipment were valued at net replacementcost as determined by the Chilean Superintendency of Electricity and Fuelsadjusted for price-level restatement in accordance with Decree Law N° 4 of1959.

 

Property,plant and equipment are currently shown at contributed amounts or cost, asappropriate, plus price-level restatement. The interest cost on debt directlyobtained in the construction projects is capitalized during the period ofconstruction. Costs of maintenance and repairs are expensed as incurred unlesssuch costs increase the useful life or productivity of the related assets, inwhich case the costs are capitalized when incurred.

 

In 1986,an increase based upon a technical appraisal of property, plant and equipmentwas recorded in the manner authorized by the SVS in Circulars No.’s 550 and 566dated October 15 and December 16, 1985, respectively, and Communication No.4790, dated December 11, 1985.

 

Property, plant and equipment received in leasing that qualify ascapital leases are accounted for as a purchase of property, plant and equipmentat the total amount of the lease obligation and interest expense on an accrualbasis. Assets obtained under financial contracts are not the legal property ofthe Company until it decides to exercise the related purchase option.Therefore, the Company cannot freely dispose of them.

 

It isthe Company’s policy, when evidence exists of an impairment of property, plantand equipment, such that the Company’s operations are not expected to producesufficient net cash flows, on a discounted basis, to recover the net carryingvalue of all property, plant and equipment, that the book values of thoseassets must be reduced to their net realizable values with a charge tonon-operating expense. The Company has not identified impairments in the netbook values of its property, plant and equipment for the years ended December31, 2003, 2004 and 2005, respectively.

 

F-23

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**2.****                 ****Summary of Significant Accounting Policies, continued:**

 

h)                 Depreciation:

 

Depreciationexpense is calculated on the price-level restated balances using thestraight-line method over the estimated useful lives of the assets.Depreciation of assets recorded under capital lease is included in depreciationexpense.

 

i)                     Investments inrelated companies:

 

Investmentsin related companies are included in “Other assets” using the equity method.This accounting method recognizes in income the Company’s proportionate sharein the net income or loss of each investee on the accrual basis****(Note 10).

 

Investmentsin foreign affiliates are recorded in accordance with Technical Bulletin No. 64and No. 72 of the Chilean Association of Accountants (see Note 2 (j)).

 

Investmentsin other companies are presented at acquisition cost adjusted for price-levelrestatement.

 

j)                     Foreign investments:

 

UnderTechnical Bulletin No. 64 of the Chilean Association of Accountants,investments in foreign subsidiaries and equity method investees are price-levelrestated, the effects of which are reflected in income, while the effects ofthe foreign exchange gains or losses between the Chilean peso and the US dollaron the foreign investment measured in US dollars, are reflected in equity inthe account “Cumulative Translation Adjustment”.

 

TheCompany has evaluated the recoverability of its foreign investments as requiredby Technical Bulletin No. 33 and No 42 of the Chilean Association ofAccountants. The result of the valuation was that no foreign investment wasimpaired as of December 31, 2003, 2004 and 2005, respectively.

 

k)                  Other intangibles:

 

Intangibles,other than goodwill, correspond primarily to easements and rights for the useof waterways and are amortized over periods not exceeding 40 years inaccordance with Technical Bulletin No. 55 of the Chilean Association ofAccountants.

 

l)                     Goodwill andnegative goodwill:

 

Goodwill and negative goodwill are determined according to SVSCircular No. 368 based on differences between the purchase price and therecorded book values of the company acquired at the effective acquisition date.Amortization is determined using the straight-line method, considering thenature and characteristic of each investment, foreseeable life of the businessand investment return, and does not exceed 20 years.

 

The Company has evaluated the recoverability of its recorded goodwilland negative goodwill in accordance with Technical Bulletin No. 56, No. 72 andthe Statement of International Accounting Standard No. 36 (IAS No. 36) “Impairmentof Assets.”  As of December 31, 2004 and2005, there were no indicators of an impairment of goodwill.

 

F-24

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**2.****                 ****Summary of Significant Accounting Policies, continued:**

 

m)               Revenuerecognition:

 

Revenues are recognized at the time energy is supplied to the customerand collectibility is reasonably assured. Energy supplied and unbilled at eachyear-end is valued at the selling price using the current rates and has beenincluded in revenue from operations. The unbilled amount is presented in currentassets as trade receivables and the corresponding cost is included in cost ofoperations. The Company recognizes revenue generated from engineering andinspection services and highway tolls at the time the related services areprovided.

 

n)                 Current and deferred income taxes:

 

The Company records income taxes in accordance with Technical BulletinNo. 60 and complementary technical bulletins thereto issued by the ChileanAssociation of Accountants, and with SVS Circulars No. 1466 and No. 1560,recognizing, using the liability method, the deferred tax effects of temporarydifferences between the financial and tax values of assets and liabilities. Asa transitional provision at the date of adoption, a contra asset or liabilityhas been recorded offsetting the effects of the deferred tax assets andliabilities not recorded prior to January 1, 2000. Such contra asset orliability must be amortized to income over the estimated average reversalperiods corresponding to the underlying temporary differences to which thedeferred tax asset or liability relates calculated using the tax rates thatwill be in effect at the time of reversal. For the years ended December 31,2003, 2004 and 2005, the Company recorded current tax expense according to thetax laws and regulations within each country of ThCh$ 53,264,370, ThCh$ 54,572,784and ThCh$ 60,140,348, respectively. A provision for income taxes resulting fromArticle 21 of the Income Tax Law has also been made in the amount of ThCh$ 105,355and ThCh$ 0, for the years ended December 31, 2004 and 2005, respectively, anda benefit for this concept of ThCh$ 79,327 was recorded for the year endedDecember 31, 2003.

 

The valuation allowances reflect amounts, which relate to deferred taxassets that management believes will more likely than not expire withoutbenefit. In future periods, management’s estimate of the amount of the deferredtax assets considered realizable may change, and hence the valuation allowancemay increase or decrease.

 

o)                 Accrued vacation expense:

 

In accordance with Technical Bulletin No. 47 issued by the ChileanAssociation of Accountants, employee vacation expenses are recorded on anaccrual basis.

 

p)                 Staff Severanceindemnity:

 

Theseverance indemnity that the Company is obliged to pay under collectivebargaining agreements to its employees who have completed 15 years of service, isrecorded based on the projected benefit obligation, which is determined using6.5% discount rate (6.5% in 2004 and 9.5% in 2003).

 

q)                 Pension andpost-retirement benefits:

 

Pension and post-retirement benefits are recorded in accordance with therespective employee collective bargaining agreements based on the actuariallydetermined projected benefit obligation using a discount rate of 6.5% in 2003,2004 and 2005.

 

F-25

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**2.****                 ****Summary of Significant Accounting Policies, continued:**

 

r)                    Statements of cashflows:

 

The Consolidated Statements of Cash Flows have been preparedusing the indirect method. For classification purposes, cash flows fromoperations include collections from clients and payments to suppliers, payrolland taxes. Cash and cash equivalents presented in the consolidated statementsof cash flows include cash, time deposits, and other balances classified ascurrent assets with maturities of less than 90 days and are detailed asfollows:

 
| ** **                      | ** ** | **As of December 31,** | ** ** |
|---------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **2003**               | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **ThCh$**              | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                            |       |                   |       |   |   |   |   |
| Cash                            |       | 5,849,458              |       | 30,705,233 |   | 10,023,121 |   |
| Time deposits                   |       | 164,804,420            |       | 193,370,032 |   | 60,468,287 |   |
| Repurchase agreements           |       | 1,857,087              |       | 13,372,194 |   | 9,002,366 |   |
| Marketable securities           |       | 1,265,443              |       | 706,217 |   | 1,870,988 |   |
| Total cash and cash equivalents |       | 173,776,408            |       | 238,153,676 |   | 81,364,762 |   |

 

s)                  Bonds:

 

Bonds payableare recorded at the face value of the bonds. The difference between the facevalue and the placement value, equal to the premium or discount, is deferredand amortized over the term of the bonds (see Note 16). Discounts on the bondissuances of Endesa-Chile and its subsidiaries deferred over the term of therespective bonds amounted to ThCh$ 12,786,252 and ThCh$ 11,151,767 as ofDecember 31, 2004 and 2005, respectively, presented in “Other assets.”

 

t)                    Financialderivative contracts:

 

As ofDecember 31, 2004 and 2005, the Company has forward contracts, currency swaps,interest rate swaps and collars with various financial institutions, which arerecorded according to Technical Bulletin No. 57 of the Chilean Association ofAccountants. Gains and losses from forward foreign exchange contracts arerecorded at estimated fair value with certain gains and losses deferred untilsettlement if the instrument qualifies as a hedge, at which time such amountsare included in earnings as “Other non-operating income and expense” upon theexpiration of the contract.

 

u)                 Research anddevelopment costs:

 

Costsincurred in research and development by the Company that are general in nature(water-level studies, hydroelectric research, seismic-activity surveys) areexpensed as incurred. Studies related to specific and approved constructionprojects are capitalized. During the years ended December 31, 2003, 2004 and2005 no such costs were incurred.

 

## v)                 Computer software:

 

The Company has deferred the costs of purchased computer softwarepackages, which are being amortized over a period of three years.

 

F-26

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**2.****                 ****Summary of Significant Accounting Policies, continued:**

 

w)     Cost of sales and Administrative and sellingexpenses:

 

The cost of sales line item in theConsolidated Statements of Income includes the cost of the following items:purchased energy and power, materials and fuel used in our operations, tolls,energy transportation, direct production salaries, depreciation, amortization,and maintenance of productive assets and other costs of operations. The Administrativeand Selling expenses line item in the Consolidated Statements of Incomeincludes the cost of the following items: general administration of theCompany, office supplies and materials, overhead salaries, the allowance fordoubtful accounts, amortization and depreciation of assets that are not used inthe production process.

 

x)      Cost recovery:

 

TheCompany has not recognized any assets for expected recoveries, throughinsurance or from others, related to litigation and other legal actions, in theperiods presented. The Company records such recoveries only in the case that itis virtually certain such recoveries will be realized. In the case that theCompany does record expected recoveries, the Company’s policy is to record suchamounts as an asset in our consolidated balance sheet, unless a right of offsetclearly exists.

 

y)      Advertising costs:

 

Advertisingcosts are expensed as incurred.

 

**3.****        ****Change in accounting policy**

 

During the year ended December 31, 2004, theCompany adopted prospectively the actuarial valuation method and changed thediscount rate included in the calculation of the obligation for staff severanceindemnities. The rate applied in 2004 was based on the rate of high-qualityfixed-income investments currently available and expected to be availableduring the period to maturity of the employees’ benefits. In prior periods theCompany recorded such obligations using the present value method determinedusing the rate based on the Company’s weighted average cost of capital. Theeffect of this change was a charge to net income for the year ended December31, 2004 of ThCh$ 413,244. For the year ended December 31, 2005, the Companydid not change its accounting policies.

 

F-24

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**4.****        ****Time deposits:**

 

Timedeposits as of December 31, 2004 and 2005 and the applicable annual interestrates and scheduled maturities as of December 31, 2005 are as follows:

 
| **Financial Institution** | ** ** | **Annual Rate** | ** ** | **Scheduled  Maturity** | ** ** | **As of December 31,** | ** ** |
|--------------------------------|------------|----------------------|------------|-------------------------|------------|----------------------------------|------------|
| ** **                     | **2004**   | ** **           | **2005**   | ** **              |
| ** **                     | ** ** | **%**                | ** ** | ** **              | ** ** | **ThCh $**                       | ** ** | **ThCh$** | ** ** |
|                           |       |                 |       |                    |       |                             |       |   |   |
| Bancafe                        |       | —               |       | —                  |       | 4,088,573                        |       | — |   |
| Banco Bilbao Vizcaya           |       | —               |       | —                  |       | 39,732,172                       |       | — |   |
| Banco Boston                   |       | 7.40                 | %          | January 2, 2006         |       | —                           |       | 1,732,762 |   |
| Banco Bradesco                 |       | —               |       | —                  |       | 1,461,639                        |       | — |   |
| Banco Colpatria                |       | —               |       | —                  |       | 1,575,485                        |       | — |   |
| Banco Continental              |       | 5.20                 | %          | January 2, 2006         |       | 2,377,410                        |       | 3,734,334 |   |
| Banco Continental de Panama    |       | 3.40                 | %          | January 1, 2006         |       | 1,740,204                        |       | 1,581,409 |   |
| Banco Correval                 |       | 3.69                 | %          | January 2, 2006         |       | —                           |       | 1,386,667 |   |
| Banco de Crédito          |       | 4.10                 | %          | January 2, 2006         |       | 2,048,454                        |       | 1,493,734 |   |
| Banco de Occidente             |       | —               |       | —                  |       | 4,534,492                        |       | — |   |
| Banco Frances                  |       | 6.58                 | %          | January 2, 2006         |       | 388,635                          |       | 5,535,539 |   |
| Banco Galicia                  |       | 8.00                 | %          | January 2, 2006         |       | —                           |       | 856,388 |   |
| Banco Itau Corp Plus           |       | 6.50                 | %          | January 2, 2006         |       | 1,426,821                        |       | 837,794 |   |
| Bancolombia                    |       | —               |       | —                  |       | 3,734,130                        |       | — |   |
| Banco Nationale de Paris       |       | 6.25                 | %          | January 2, 2006         |       | 614,465                          |       | 338,284 |   |
| Banco Río de la Plata     |       | 7.38                 | %          | January 2, 2006         |       | 978,735                          |       | 1,840,199 |   |
| Banco Santander                |       | 1.20                 | %          | January 2, 2006         |       | 94,353                           |       | 63,465 |   |
| Banco Santander                |       | 2.78                 | %          | January 2, 2006         |       | 1,018,449                        |       | 5,217,288 |   |
| Banco Wiese Sudameris          |       | 5.00                 | %          | January 2, 2006         |       | —                           |       | 1,120,300 |   |
| Bank of America                |       | 3.67                 | %          | January 2, 2006         |       | 8,484,714                        |       | 7,510,103 |   |
| BBVA Colombia                  |       | 4.92                 | %          | January 2, 2006         |       | 2,651,339                        |       | 1,327,122 |   |
| CDB Bradesco                   |       | —               |       | —                  |       | 79,635                           |       | — |   |
| CDT Otros                      |       | 6.90                 | %          | January 2, 2006         |       | 756,370                          |       | 1,571 |   |
| Citibank                       |       | 4.08                 | %          | January 2, 2006         |       | 53,784,440                       |       | 10,486,875 |   |
| Citibank Large Corp.           |       | —               |       | —                  |       | 1,363,974                        |       | — |   |
| Citibank N.A. (Overnight)      |       | 3.03                 | %          | January 2, 2006         |       | —                           |       | 183,938 |   |
| Citibank New York              |       | 3.70                 | %          | January 2, 2006         |       | 1,001,327                        |       | 1,966,463 |   |
| Citiliquid                     |       | —               |       | —                  |       | 448,090                          |       | — |   |
| Citi trust                     |       | —               |       | —                  |       | 2,327                            |       | — |   |
| Corfinsura                     |       | —               |       | —                  |       | 8,814,448                        |       | — |   |
| Corfinsura Internacional       |       | —               |       | —                  |       | 3,059,964                        |       | — |   |
| Corfivalle                     |       | —               |       | —                  |       | 2,206,824                        |       | — |   |
| Credit Bank                    |       | 3.35                 | %          | January 2, 2006         |       | —                           |       | 1,876,849 |   |
| FAM Fondo Ganadero             |       | 4.84                 | %          | January 2, 2006         |       | 1,494,229                        |       | 677 |   |
| Fidubogota                     |       | 2.31                 | %          | January 2, 2006         |       | —                           |       | 1,186 |   |
| Fiduciaria del Valle           |       | 4.89                 | %          | January 2, 2006         |       | 6,039,903                        |       | 1,423,215 |   |
| Fiducolombia                   |       | 5.33                 | %          | January 2, 2006         |       | 4,264,296                        |       | 1,413 |   |
| Subtotal                       |       |                 |       |                    |       | 160,265,897                      |       | 50,517,575 |   |

 

F-25

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| Fiduoccidente               |   | 5.60   | %      | January 2, 2006 |   | —      |   | 734,716    |   |
|-----------------------------|--------|--------|--------|-----------------|--------|-------------|--------|------------|--------|
| Fiduvalle Multiplicar       |   | 6.55   | %      | January 2, 2006 |   | 2,543,597   |   | 3,168,762  |   |
| Fondo C. Fidunion           |   | 5.15   | %      | January 2, 2006 |   | —      |   | 2,228      |   |
| Fondo de pensiones Porvenir |   | 1.09   | %      | January 2, 2006 |   | 455,139     |   | 505,158    |   |
| Ford Motor                  |   | — |   | —          |   | 5,791,298   |   | —     |   |
| HSBC                        |   | 5.50   | %      | January 2, 2006 |   | 1,917,722   |   | 653,074    |   |
| Interbolsa                  |   | — |   | —          |   | 6,668,642   |   | —     |   |
| Itau Performance            |   | — |   | —          |   | 1,074,690   |   | —     |   |
| Serfinco                    |   | 6.10   | %      | January 2, 2006 |   | 83,648      |   | 152,299    |   |
| Suleasing                   |   | — |   | —          |   | 1,208,215   |   | —     |   |
| Suvalor                     |   | — |   | —          |   | 11,955,328  |   | —     |   |
| Unibanco Inst.RF            |   | — |   | —          |   | 1,405,856   |   | —     |   |
| Other time deposits         |   | — |   | —          |   | —      |   | 4,734,475  |   |
|                        |   |   |   |            |   |        |   |       |   |
| Total                       |   |   |   |            |   | 193,370,032 |   | 60,468,287 |   |

 

**5.****        ****Accounts, notes and other receivables:**

 

a.      Current accounts, notes and other receivablesand related allowances for doubtful accounts as of December 31, 2004 and 2005are as follows:

 
| ** **            | ** ** | **As of December 31,** | ** ** |
|-----------------------|------------|---------------------------------------|------------|
| ** **            | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| **Account**           | ** ** | **Under 90  days**               | ** ** | **91 days  to 1 year** | ** ** | **Allowance** | ** ** | **Total** | ** ** | **Under 90  Days** | ** ** | **91 days to  1 year** | ** ** | **Allowance** | ** ** | **Total** | ** ** |
| ** **            | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| ** **            | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accounts Receivable   |       | 107,100,518                           |       | 4,731,317 |   | (2,580,059 | ) | 109,251,776 |   | 100,115,685 |   | 1,744,638 |   | (2,320,032 | ) | 99,540,291 |   |
|                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes receivable      |       | 160,730                               |       | 54,300 |   | — |   | 215,030 |   | — |   | — |   | — |   | — |   |
|                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Receivables (1) |       | 27,638,258                            |       | 10,564,339 |   | (900,864 | ) | 37,301,733 |   | 20,070,851 |   | 17,440,170 |   | (855,756 | ) | 36,655,265 |   |
|                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                 |       | 134,899,506                           |       | 15,349,956 |   | (3,480,923 | ) | 146,768,539 |   | 120,186,536 |   | 19,184,808 |   | (3,175,788 | ) | 136,195,556 |   |

 

Long-termreceivables as of December 31, 2004 and 2005 are ThCh$ 36,288,858 and ThCh$26,436,799, respectively, net of valuation allowance of ThCh$0 and ThCh$0,respectively.

 

----

(1)   As of December 31, 2005 the balance includesan amount of ThCh$ 19,303,746 (ThCh$ 8,353,240 in 2004) that will be reimbursedto Endesa and its subsidiaries for transmission line use. The balance of thereceivables was recognized as a result of Energy Law changes in Chile in 2003.

 

F-26

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**5.****        ****Accounts, notes and other receivables, continued:**

 

b.      Current and long-term accounts receivable,net of Allowances for Doubtful Accounts, by country as of December 31, 2004 and2005 are as follows:

 
| ** **  | ** ** | **As of December 31,** | ** ** |
|-------------|------------|---------------------------------------|------------|
| ** **  | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| **Country** | ** ** | **ThCh$**                             | ** ** | **%** | ** ** | **ThCh$** | ** ** | **%** | ** ** |
|        |       |                                  |       |   |   |   |   |   |   |
| Chile       |       | 66,355,225                            |       | 36.25 | % | 64,812,040 |   | 39.85 | % |
| Peru        |       | 17,666,495                            |       | 9.65 | % | 16,887,000 |   | 10.38 | % |
| Argentina   |       | 20,479,427                            |       | 11.19 | % | 41,726,728 |   | 25.66 | % |
| Colombia    |       | 29,272,877                            |       | 15.99 | % | 34,418,159 |   | 21.16 | % |
| Brazil (1)  |       | 44,488,587                            |       | 24.30 | % | — |   | 0.00 | % |
| Panama      |       | 4,794,786                             |       | 2.62 | % | 4,788,428 |   | 2.95 | % |
| Total       |       | 183,057,397                           |       | 100.00 | % | 162,632,355 |   | 100.00 | % |

 

----

(1)—See footnote 10(c) (iii.) discussing the de-consolidation of EndesaBrasil.

 

c.      Changes in the allowance for doubtfulaccounts are as follows:

 
| ** **                                         | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **ThCh$**                                  | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                               |       |                                       |       |   |   |   |   |
| Beginning balance                                  |       | 5,930,668                                  |       | 3,906,629 |   | 3,480,923 |   |
| Charged to expense                                 |       | 625,726                                    |       | 560,265 |   | 167,509 |   |
| Deductions                                         |       | (2,249,813                                 | )          | (1,159,246 | ) | (134,038 | ) |
| Price-level restatement and conversion  adjustment |       | (399,952                                   | )          | 173,275 |   | (338,606 | ) |
| Ending balance                                     |       | 3,906,629                                  |       | 3,480,923 |   | 3,175,788 |   |

 

d.      Sales recorded but not invoiced are ThCh$61,342,529, ThCh$ 78,646,148 and ThCh$ 72,686,145 as of December 31, 2003, 2004and 2005, respectively.

 

F-27

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**6.****        ****Transactions with Related Companies:**

 

Balancesof accounts receivable and payable classified according to the nature of therelated company transaction are as follows as of December 31, 2004 and 2005:

 

a.      Notes and accounts receivable from relatedcompanies:

 
| ** **                                                | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                | ** ** | **Short-term**                        | ** ** | **Long-term** | ** ** |
| **Company Name**                                     | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                |       | **ThCh$**                             |       | **ThCh$** |   | **ThCh$** |   | **ThCh$** |   |
| ** **                                                |       | ** **                            |       | ** ** |   | ** ** |   | ** ** |   |
| Transmisora Eléctrica de Quillota Ltda.              |       | 319,861                               |       | 318,061 |   | 315,045 |   | — |   |
| Atacama Finance Co. (1)                                   |       | 109,906,310                           |       | 21,209 |   | — |   | 89,826,992 |   |
| Cía de Energía del Mercosur S.A.                |       | 3,429,515                             |       | 791,377 |   | — |   | — |   |
| Chilectra S.A.                                            |       | 12,120,844                            |       | 13,695,715 |   | 382 |   | 369 |   |
| Cía. Interconexión Energética S.A.         |       | 1,732,457                             |       | 161,361 |   | — |   | — |   |
| Codensa S.A.                                              |       | 20,563,758                            |       | 15,277,119 |   | — |   | — |   |
| Edelnor S.A.                                              |       | 3,504,646                             |       | 4,048,371 |   | — |   | — |   |
| Empresa Eléctrica Piura S.A.                         |       | 2,817                                 |       | 2,194 |   | — |   | — |   |
| Enersis S.A.                                              |       | 104,836                               |       | 529,817 |   | — |   | — |   |
| Etevensa S.A.                                             |       | 17,883                                |       | 73,221 |   | — |   | — |   |
| Gasoducto Tal Ltda.                                       |       | 77,790                                |       | 32,171 |   | — |   | — |   |
| Gas Atacama Generación Ltda.                         |       | 28,974                                |       | 20,594 |   | — |   | — |   |
| Gas Atacama S.A.                                          |       | —                                |       | 176,250 |   | — |   | — |   |
| Cachoeira Dourada S.A.                                    |       | —                                |       | 891 |   | — |   | — |   |
| Central Generadora Termoeléctrica de  Fortaleza S.A. |       | 5,858                                 |       | 27,744 |   | — |   | — |   |
| Cam Colombia Ltda.                                        |       | 62,496                                |       | 104,755 |   | — |   | — |   |
| Synapsis Soluciones y Servicios IT Ltda.                  |       | 18,214                                |       | 9,307 |   | — |   | — |   |
| Inversiones Eléctricas Quillota S.A.                 |       | 2,072                                 |       | — |   | — |   | — |   |
| Ampla S.A.                                                |       | 13,532                                |       | — |   | — |   | — |   |
| Elesur S.A.                                               |       | 1,318                                 |       | — |   | — |   | — |   |
| Consorcio Ingendesa—Minmetal Ltda.                   |       | 16,281                                |       | 8,336 |   | 31,080 |   | — |   |
| Gasoducto Atacama Chile S.A.                              |       | 200,148                               |       | — |   | — |   | — |   |
| Consorcio Ara—Ingendesa Ltda.                        |       | 208,898                               |       | 68,270 |   | — |   | — |   |
| Sociedad Consorcio Ingendesa Ara Ltda.                    |       | 13,908                                |       | 17,102 |   | — |   | — |   |
| Total                                                     |       | 152,352,416                           |       | 35,383,865 |   | 346,507 |   | 89,827,361 |   |

 

----

(1)   The receivables from Atacama Finance Co.correspond to loans given by Compañía Eléctrica Cono Sur S.A. originally forthe purpose of financing construction works of Gasoducto Atacama ArgentinaS.A., Gasoducto Atacama Chile S.A. and Gas Atacama Generación S.A. The loansare denominated in US dollars, bear weighted average interest of 4.25% andmature in March 2007.

 

F-28

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**6.****        ****Transactions with Related Companies, continued:**

 

b.      Notes and accounts payable due to relatedcompanies:

 
| ** **                                               | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                               | ** ** | **Short-term**                        | ** ** | **Long-term** | ** ** |
| **Company Name**                                    | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| ** **                                               | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cachoeira Dourada S.A.                                   |       | —                                |       | 22,940 |   | — |   | — |   |
| Compañía de Energía del Mercosur S.A.     |       | 244,862                               |       | 7,781 |   | — |   | — |   |
| Compañía de Transmisión del Mercosur S.A. |       | 185,021                               |       | 161,361 |   | — |   | — |   |
| Chilectra S.A.                                           |       | 68,643                                |       | 1,640,217 |   | — |   | — |   |
| Codensa S.A.                                             |       | 3,392,818                             |       | 3,025,396 |   | — |   | — |   |
| Enersis S.A (1)                                          |       | 1,503,612                             |       | 731,901 |   | 52,980 |   | — |   |
| Synapsis Soluciones y Servicios IT Ltda.                 |       | 641,200                               |       | 635,532 |   | — |   | — |   |
| Transmisora Eléctrica de Quillota Ltda.             |       | 26,334                                |       | 24,358 |   | — |   | — |   |
| Compañía Americana de Multiservicios Ltda.     |       | 2,075                                 |       | 1,296 |   | — |   | — |   |
| Electrogas S.A.                                          |       | 215,191                               |       | 199,924 |   | — |   | — |   |
| Cam Colombia Ltda.                                       |       | 247,452                               |       | 572,278 |   | — |   | — |   |
| Synapsis Perú S.A.                                  |       | 14,206                                |       | 119,795 |   | — |   | — |   |
| Synapsis Colombia S.A.                                   |       | 67,851                                |       | 11,897 |   | — |   | — |   |
| Consorcio Ingendesa Minmetal Ltda.                       |       | —                                |       | 1,549 |   | — |   | — |   |
| Edelnor S.A.                                             |       | 3,983                                 |       | 11,820 |   | — |   | — |   |
| Cam Perú                                            |       | —                                |       | 2,316 |   | — |   | — |   |
| Total                                                    |       | 6,613,248                             |       | 7,170,361 |   | 52,980 |   | — |   |

 

Short-termaccounts receivable from and payable to related companies are related to thesales and purchases of electricity and various services, as well as operating loans. Transactionsfor electricity and services have payment terms of 30 days and are notadjustable. Operating loans are adjustable and require payment of interest.

 

----

(1)   The accounts payable to Enersis S.A. for bothyears result mainly from financing operations. They are denominated in USdollars and bear interest at market rates according to Libor (London InterbankOffer Rate) + 0.955%.

 

Othershort-term receivables and payables bear interest rate of TIP + 0.05%. TIP isan inter-bank average interest rate, which was 4.65% as of December 31, 2005.

 

F-29

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**6.****        ****Transactions with Related Companies, continued:**

 

c.      The most significant transactions and theireffects in income (expense) for each year ended December 31 are as follows:

 
| ** **                                        | ** ** | **Nature of  Transaction** | ** ** | **Income (expense)** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|---------------------------|------------|
| **Company**                                       | ** ** | ** **                      | **2003**   | ** **                | **2004**   | ** ** | **2005** | ** ** |
| ** **                                        | ** ** | ** **                      | ** ** | **ThCh$**                 | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                              |       |                            |       |                      |       |   |   |   |   |
| Atacama Finance Co.                               |       | Interest                        |       | 5,883,204                 |       | 6,637,288 |   | 4,822,970 |   |
|                                              |       | Price-level  restatement        |       | 1,845,359                 |       | 3,089,815 |   | 3,784,398 |   |
|                                              |       | Foreign  currency translation   |       | (30,786,235               | )          | (10,646,421 | ) | (12,350,134 | ) |
| Cia. Americana Multiservicios Ltda.               |       | Services  provided              |       | 76,788                    |       | — |   | 627 |   |
|                                              |       | Services  received              |       | (1,206                    | )          | — |   | — |   |
| Cen. Gen. Termoeléctrica de Fortaleza S.A.   |       | Services  provided              |       | 1,137,583                 |       | 291,751 |   | 36,868 |   |
| Com. de Energía del Mercosur S.A.            |       | Sales of  energy                |       | 21,225,154                |       | 20,189,380 |   | 11,028,488 |   |
|                                              |       | Purchases of  energy            |       | (2,257,391                | )          | (754,749 | ) | (862,025 | ) |
| Codensa S.A.                                      |       | Purchases of  energy            |       | (12,128,749               | )          | (14,267,437 | ) | (16,225,453 | ) |
|                                              |       | Sales of  energy                |       | 79,798,782                |       | 77,842,001 |   | 63,972,172 |   |
|                                              |       | Services  provided              |       | 54,228                    |       | 58,679 |   | 63,924 |   |
|                                              |       | Services  received              |       | (467,873                  | )          | (603,452 | ) | (918,062 | ) |
|                                              |       | Interest                        |       | (3,292,134                | )          | (3,115,431 | ) | — |   |
| Cía. Transmisión del Mercosur S.A.      |       | Purchases of  energy            |       | (2,185,508                | )          | (2,244,612 | ) | (2,003,875 | ) |
| Cía. Interconexión Energética S.A. |       | Sales of  energy                |       | 22,732,182                |       | 19,889,675 |   | 5,134,107 |   |
|                                              |       | Foreign  currency translation   |       | —                    |       | — |   | 157,035 |   |
| Empresa Proprietaria de la Red                    |       | Services  provided              |       | 158,652                   |       | — |   | — |   |
| Chilectra S.A.                                    |       | Sales of  energy                |       | 130,449,046               |       | 133,680,224 |   | 141,828,893 |   |
|                                              |       | Services  provided              |       | 2,158,811                 |       | 2,305,047 |   | 2,443,567 |   |
|                                              |       | Services  received              |       | (87,500                   | )          | (6,719 | ) | (85,498 | ) |
| Gas Atacama Generación S.A.                  |       | Services  provided              |       | 83,170                    |       | 1,789 |   | 144,239 |   |
| Gas Atacama S.A.                                  |       | Foreign  currency translation   |       | —                    |       | (132,207 | ) | — |   |
| Empresa Eléctrica Piura S.A.                 |       | Sales of  energy                |       | 519,032                   |       | 130,353 |   | 707,782 |   |
|                                              |       | Services  provided              |       | —                    |       | — |   | 2,523 |   |
| Enersis S.A.                                      |       | Interest                        |       | (2,231,567                | )          | (2,005,236 | ) | (397,200 | ) |
|                                              |       | Services  provided              |       | 967,678                   |       | 237,175 |   | 310,590 |   |
|                                              |       | Foreign  currency translation   |       | 1,966,548                 |       | (2,687,538 | ) | 681,759 |   |
|                                              |       | Price-level  restatement        |       | (294,460                  | )          | (226,341 | ) | — |   |
| Enersis Internacional S.A.                        |       | Interest                        |       | (20,337                   | )          | — |   | — |   |
|                                              |       | Foreign  currency translation   |       | 106,469                   |       | — |   | — |   |
|                                              |       | Price-level  restatement        |       | (34,338                   | )          | — |   | — |   |
| Ingendesa do Brasil Ltda.                         |       | Services  received              |       | —                    |       | — |   | (4,613 | ) |
| Consorcio Ingendesa ARA Ltda.                     |       | Services  provided              |       | —                    |       | — |   | 214,586 |   |
| Etevensa S.A.                                     |       | Sales of  energy                |       | 2,351,135                 |       | 1,574,857 |   | 1,004,928 |   |
|                                              |       | Services  provided              |       | 61,197                    |       | 315,876 |   | 536,086 |   |
| Subtotal (continued on next page)                 |       |                            |       | 217,787,720               |       | 229,553,767 |   | 204,028,682 |   |

 

F-30

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**6.****        ****Transactions with Related Companies, continued:**

 
| ** **                               | ** ** | **Nature of  Transaction** | ** ** | **Income (expense)** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|---------------------------|------------|
| **Company**                              | ** ** | ** **                      | **2003**   | ** **                | **2004**   | ** ** | **2005** | ** ** |
| ** **                               | ** ** | ** **                      | ** ** | **ThCh$**                 | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| ** **                               | ** ** | ** **                      | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Subtotal (cont. from previous page)      |       |                            |       | 217,787,720               |       | 229,553,767 |   | 204,028,682 |   |
| Electrogas S.A.                          |       | Purchases of  gas               |       | (2,780,070                | )          | (2,770,688 | ) | (1,552,938 | ) |
|                                     |       | Services  provided              |       | 2,532                     |       | — |   | — |   |
| Endesa Brasil S.A.                       |       | Services  provided              |       | —                    |       | — |   | 67,391 |   |
| Edelnor S.A.                             |       | Sales of  energy                |       | 29,753,986                |       | 32,617,259 |   | 26,452,367 |   |
| Endesa España                       |       | Services  provided              |       | —                    |       | — |   | 39,217 |   |
| Endesa Servicios Generales               |       | Services  received              |       | 130,343                   |       | — |   | — |   |
| Cam Colombia Ltda.                       |       | Services  received              |       | (334,826                  | )          | (249,423 | ) | (346,490 | ) |
| Cam Perú S.A.                       |       | Services  received              |       | —                    |       | — |   | (42,255 | ) |
| Elesur S.A.                              |       | Services  provided              |       | 18,264                    |       | 6,226 |   | — |   |
| Synapsis Sol y Serv. IT Ltda.            |       | Services  received              |       | (2,429,674                | )          | (1,815,048 | ) | (1,828,684 | ) |
| Synapsis Colombia                        |       | Services  received              |       | (397,881                  | )          | (476,040 | ) | (442,617 | ) |
| Synapsis Brasil S.A.                     |       | Services  received              |       | —                    |       | — |   | (86,409 | ) |
| Synapsis Perú S.A.                  |       | Services  received              |       | —                    |       | — |   | (274,261 | ) |
| Consorcio ARA - Ingendesa Ltda.          |       | Services  provided              |       | 2,205,666                 |       | 2,664,798 |   | 1,886,722 |   |
| Cachoeira Dourada S.A.                   |       | Services  provided              |       | —                    |       | — |   | 31,773 |   |
| Transmisora Eléc. de Quillota Ltda. |       | Interest                        |       | 113,884                   |       | 84,024 |   | 60,650 |   |
|                                     |       | Services  provided              |       | 136,235                   |       | 88,378 |   | 4,800 |   |
|                                     |       | Price-level  restatement        |       | 26,264                    |       | 59,368 |   | — |   |
| Ampla Energía y Servicios S.A.      |       | Services provided               |       | —                    |       | — |   | 78,639 |   |
| Sociedad Agrícola Pastos Verdes     |       | Services  provided              |       | —                    |       | 900 |   | — |   |
| Consorcio Ingendesa Minmetal Ltda.       |       | Services  provided              |       | —                    |       | 63,342 |   | 104,251 |   |
| Empresa Eléctrica de Bogotá    |       | Services  provided              |       | (2,281,976                | )          | — |   | — |   |
| Total                                    |       |                            |       | 241,950,467               |       | 259,826,863 |   | 228,180,838 |   |

 

Thesetransactions were carried out at prices that approximate market value.

 

Thetransfer of short-term funds between related companies, which are not forcollection or payment of services, is on the basis of a current cash account,at a variable interest rate based on market conditions. The resulting accountsreceivable and accounts payable are essentially on 30-day terms, with automaticrollover for the same period and settlement in line with cash flows.

 

F-31

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**7.****        ****Income taxes:**

 

a.      Taxes recoverable (payable) as of eachyear-end are as follows:

 
| ** **             | ** ** | **As of December 31,** | ** ** |
|------------------------|------------|---------------------------------------|------------|
| ** **             | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **             | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** |
|                   |       |                                  |       |   |   |
| Income tax payable     |       | (14,026,590                           | )          | (16,185,528 | ) |
| Income tax recoverable |       | 6,680,880                             |       | 3,356,518 |   |
| VAT recoverable        |       | (1,570,633                            | )          | 2,284,247 |   |
| Net                    |       | (8,916,343                            | )          | (10,544,763 | ) |

 

b.      In accordance with BT No. 60 andcomplementary bulletins thereto of the Chilean Association of Accountants, andapplicable circulars issued by the SVS, the Company and its subsidiaries haverecorded consolidated deferred income taxes as of December 31, 2004 and 2005 asfollows:

 
| ** **                          | ** ** | **As of December 31, 2004** | ** ** | **As of December 31, 2005** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                          | ** ** | **Asset**                                       | ** ** | **Liability**                                   | ** ** | **Asset** | ** ** | **Liability** | ** ** |
| ** **                          | ** ** | **Short-term**                                  | ** ** | **Long-term**                                   | ** ** | **Short-term** | ** ** | **Long-term** | ** ** | **Short-term** | ** ** | **Long-term** | ** ** | **Short-term** | ** ** | **Long-term** | ** ** |
| ** **                          | ** ** | **ThCh$**                                       | ** ** | **ThCh$**                                       | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts     |       | 21,055                                          |       | 67,868                                          |       | — |   | — |   | 5,534 |   | 5,430,194 |   | — |   | — |   |
| Deferred income                     |       | 31,841                                          |       | 1,058,277                                       |       | — |   | — |   | 114,122 |   | 980,214 |   | — |   | — |   |
| Vacation accrual                    |       | 378,462                                         |       | —                                          |       | — |   | — |   | 412,871 |   | — |   | — |   | — |   |
| Assets in leasing                   |       | —                                          |       | —                                          |       | — |   | 366,961 |   | — |   | — |   | — |   | 549,411 |   |
| Depreciation                        |       | —                                          |       | 2,997,634                                       |       | 30,606 |   | 276,373,472 |   | — |   | — |   | — |   | 241,273,315 |   |
| Severance indemnities               |       | —                                          |       | —                                          |       | — |   | 1,293,562 |   | — |   | — |   | — |   | 1,119,706 |   |
| Other events                        |       | —                                          |       | 113,742                                         |       | — |   | 14,722 |   | — |   | — |   | — |   | 7,104 |   |
| Deferred Expenses                   |       | —                                          |       | —                                          |       | — |   | 4,473 |   | — |   | — |   | — |   | 1,139,805 |   |
| Finance costs                       |       | —                                          |       | —                                          |       | — |   | 13,449,698 |   | — |   | 100,433 |   | — |   | 12,982,336 |   |
| Tax losses                          |       | —                                          |       | 55,963,240                                      |       | — |   | — |   | — |   | 32,454,663 |   | — |   | — |   |
| Contingencies                       |       | 193,077                                         |       | —                                          |       | — |   | — |   | 1,201,455 |   | — |   | — |   | — |   |
| Imputed interest on construction    |       | —                                          |       | —                                          |       | — |   | 4,447,693 |   | — |   | — |   | — |   | 4,063,474 |   |
| Costs of studies                    |       | —                                          |       | —                                          |       | — |   | 8,399,073 |   | — |   | — |   | — |   | 8,323,252 |   |
| Spare parts used                    |       | —                                          |       | —                                          |       | — |   | 928,167 |   | — |   | — |   | — |   | 840,151 |   |
| Accrued liabilities                 |       | 456,984                                         |       | —                                          |       | — |   | — |   | 387,805 |   | — |   | — |   | — |   |
| Bonds discount                      |       | —                                          |       | —                                          |       | — |   | 500,675 |   | — |   | — |   | — |   | 412,255 |   |
| Construction in progress            |       | —                                          |       | 3,763,092                                       |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Intangibles                         |       | —                                          |       | —                                          |       | — |   | 585,055 |   | — |   | — |   | — |   | 459,171 |   |
| Recoverable contributions to assets |       | —                                          |       | —                                          |       | — |   | 576,022 |   | — |   | — |   | — |   | 475,430 |   |
| Forward and swap contracts          |       | 1,673,910                                       |       | —                                          |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Provision for obsolete materials    |       | —                                          |       | 1,604,460                                       |       | — |   | 492,084 |   | — |   | 1,499,233 |   | — |   | — |   |
| Pension benefits                    |       | 301,441                                         |       | 755,653                                         |       | — |   | — |   | 359,780 |   | 1,164,730 |   | — |   | — |   |
| Tax for external credit             |       | —                                          |       | —                                          |       | — |   | 1,000,195 |   | — |   | — |   | — |   | 939,572 |   |
| Commission for external credit      |       | —                                          |       | —                                          |       | — |   | 160,948 |   | — |   | — |   | — |   | 122,820 |   |
| Complementary accounts, net         |       | —                                          |       | (18,218,627                                     | )          | — |   | (186,287,543 | ) | — |   | (4,584,178 | ) | — |   | (139,886,336 | ) |
| Valuation allowance                 |       | —                                          |       | (3,040,791                                      | )          | — |   | — |   | — |   | (3,698,803 | ) | — |   | — |   |
| Total                               |       | 3,056,770                                       |       | 45,064,548                                      |       | 30,606 |   | 122,305,257 |   | 2,481,567 |   | 33,346,486 |   | — |   | 132,821,466 |   |
| Net deferred tax balance            |       | 3,026,164                                       |       | —                                          |       | — |   | (77,240,709 | ) | 2,481,567 |   | — |   | — |   | (99,474,980 | ) |

 

F-32

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**7.****        ****Income taxes, continued:**

 

c.      Income tax expense for the years endedDecember 31, 2003, 2004 and 2005 is as follows:

 
| ** **                               | ** ** | **As of December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                     |       |                                  |       |   |   |   |   |
| **Current income tax (expense) benefit** |       |                                  |       |   |   |   |   |
| Income tax provision                     |       | (53,264,370                           | )          | (54,572,784 | ) | (60,140,348 | ) |
| Adjustment for tax expense prior year    |       | (1,742                                | )          | — |   | — |   |
|                                     |       |                                  |       |   |   |   |   |
| **Non-deductible expense tax Art. 21**   |       | 79,327                                |       | (105,355 | ) | — |   |
|                                     |       |                                  |       |   |   |   |   |
| **Deferred tax (expense) benefit**       |       |                                  |       |   |   |   |   |
| Deferred taxes                           |       | 42,854,125                            |       | (34,354,516 | ) | (26,757,438 | ) |
| Amortization of complementary accounts   |       | (18,699,114                           | )          | (8,941,400 | ) | (3,180,078 | ) |
| Change in valuation allowance            |       | (41,012                               | )          | (40,291 | ) | (896,880 | ) |
| Other charges or credits                 |       | —                                |       | 1,224,187 |   | (979,642 | ) |
| Total                                    |       | (29,072,786                           | )          | (96,790,159 | ) | (91,954,386 | ) |

 

**8.****        ****Other current assets:**

 

Othercurrent assets as of each year-end are as follows:

 
| ** **                                                    | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** |
| Accounts receivable from the Chilean  Ministry of PublicWorks |       | 30,600                                |       | — |   |
| Deposits related to payments to suppliers                     |       | 1,118,288                             |       | 133,821 |   |
| Repurchase agreements                                         |       | 13,372,194                            |       | 9,002,366 |   |
| Unrealized losses on derivatives                              |       | 158,437                               |       | — |   |
| Marketable securities                                         |       | 706,217                               |       | 1,870,988 |   |
| Other                                                         |       | 101,885                               |       | 86,490 |   |
| Total                                                         |       | 15,487,621                            |       | 11,093,665 |   |

 

F-33

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**9.****        ****Property, plant and equipment:**

 

Thecomposition of Property, plant and equipment as of each year end is as follows:

 
| ** **                                                | ** ** | **Estimated years**      | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------|------------|---------------------------------------|------------|
| ** **                                                | ** ** | **of useful lives** | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | ** **                    | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** |
| ** **                                                | ** ** | ** **                    | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Land                                                      |       | —                        |       | 48,467,458                            |       | 45,493,670 |   |
|                                                      |       |                          |       |                                  |       |   |   |
| Buildings and infrastructure                              |       | 35 – 40                  |       | 5,631,412,324                         |       | 4,987,084,681 |   |
|                                                      |       |                          |       |                                  |       |   |   |
| Distribution and transmission lines and  public lighting  |       | 35                            |       | 30,305,743                            |       | 27,829,565 |   |
|                                                      |       |                          |       |                                  |       |   |   |
| Machinery and equipment                                   |       | 10 – 40                  |       | 1,033,399,377                         |       | 912,210,443 |   |
|                                                      |       |                          |       |                                  |       |   |   |
| Construction in progress                                  |       | —                        |       | 27,504,306                            |       | 32,232,486 |   |
| Property, plant and equipment in leasing  (1)             |       | —                        |       | 28,760,031                            |       | 27,652,502 |   |
| Furniture and fixtures, tools, software and  IT equipment |       | 3 – 10                   |       | 23,626,040                            |       | 23,158,865 |   |
| Vehicles                                                  |       | 6 – 10                   |       | 2,088,532                             |       | 1,846,310 |   |
| Other assets                                              |       | 3 – 8                    |       | 7,098,620                             |       | 5,711,831 |   |
| Sub-total                                                 |       |                          |       | 89,077,529                            |       | 90,601,994 |   |
|                                                      |       |                          |       |                                  |       |   |   |
| Technical appraisal                                       |       | —                        |       | 586,013,669                           |       | 424,882,224 |   |
|                                                      |       |                          |       |                                  |       |   |   |
| Total Property, plant and equipment                       |       |                          |       | 7,418,676,100                         |       | 6,488,102,577 |   |
|                                                      |       |                          |       |                                  |       |   |   |
| Less: Accumulated depreciation                            |       |                          |       | (2,783,027,115                        | )          | (2,578,002,759 | ) |
| Total Property, plant and equipment, net                  |       |                          |       | 4,635,648,985                         |       | 3,910,099,818 |   |

 

----

(1)   Refers to a leasing contract between theCompany and Abengoa Chile S.A. for transmission lines and the related technicalinstallations. This contract has a duration of 20 years and the annual interestrate per year is 6.5%. As of December 31, 2005, the total leasing obligationamounts to ThCh$ 24,420,669, which respective parts are presented in othercurrent liabilities and other long-term liabilities.

 

Depreciationexpense, including depreciation of assets held in capital leases, was ThCh$190,598,968, ThCh$ 176,938,746 and ThCh$ 170,472,022 for the years endedDecember 31, 2003, 2004 and 2005, respectively.

 

F-34

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**9.****        ****Property, plant and equipment, continued:**

 

*Recoverability of property, plant and equipment*

 

TheCompany periodically analyzes the recoverability of the recorded book values ofits property, plant and equipment, including property, plant and equipment heldby the Company’s subsidiaries in countries outside of Chile where these assetsare measured into US dollars. The analyses consist of evaluating therecoverability of the Company’s property, plant and equipment by comparingestimated future undiscounted cash flows to the carrying amounts of such assetsrecorded by the Company in these companies, in accordance with Chilean GAAP.These analyses differ from impairment testing performed for goodwill (see Note12). The result of these analyses determined that no adjustments to the netbook values of the property, plant and equipment of the Company and itssubsidiaries as of December 31, 2005 were required.

 

F-35

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**10.****     ****Investment in related companies:**

 

a.      Investments as of each year-end are asfollows:

 
| ** **                                            | ** ** | **As of  December  31, 2004** | ** ** | **As of December 31, 2005** | ** ** | **Carrying Value** | ** ** | **Equity in Net Earnings (Losses)** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------|------------|-------------------------|------------|---------------------------------------------------------|------------|
| **Related Companies**                            | ** ** | **Percentage  Owned**                   | ** ** | **Number  of Shares**                      | ** ** | **Percentage  Owned**   | ** ** | **Related  Equity**                                     | ** ** | **2004** | ** ** | **2005** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **%**                                   | ** ** | ** **                                      | ** ** | **%**                   | ** ** | **ThCh$**                                               | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                                  |       |                                    |       |                                            |       |                    |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Comp. de  Interconexión Energética S.A. (1) |       | 45.00                                   | %          | —                                          |       | 0.00                    | %          | —                                                  |       | 54,730,908 |   | — |   | 11,831,252 |   | 6,676,580 |   | (7,711,755 | ) |
| Gas Atacama  Generación S.A.                     |       | 0.05                                    | %          | —                                          |       | 0.05                    | %          | 39,863,084                                              |       | 28,134 |   | 19,931 |   | 1,730 |   | (681 | ) | (5,037 | ) |
| Gasoducto Atacama  Argentina S.A.                     |       | 0.05                                    | %          | —                                          |       | 0.05                    | %          | 60,473,588                                              |       | 29,299 |   | 30,237 |   | 783 |   | 2,775 |   | 4,234 |   |
| Gasoducto Atacama  Chile S.A.                         |       | 0.05                                    | %          | —                                          |       | 0.05                    | %          | 66,963,344                                              |       | 30,992 |   | 33,482 |   | 2,810 |   | 5,975 |   | 5,976 |   |
| Inversiones  Eléctricas Quillota S.A. (2)        |       | 50.00                                   | %          | —                                          |       | 0.00                    | %          | —                                                  |       | 13,599,427 |   | — |   | 3,493,882 |   | 3,677,360 |   | — |   |
| Inversiones Electrogas  S.A.                          |       | 42.50                                   | %          | 425                                             |       | 42.50                   | %          | 17,570,887                                              |       | 7,970,041 |   | 7,467,627 |   | 2,643,268 |   | 2,161,962 |   | 1,749,780 |   |
| Inversiones Gas  Atacama Holding Ltda.                |       | 50.00                                   | %          | —                                          |       | 50.00                   | %          | 166,285,792                                             |       | 86,673,808 |   | 83,142,896 |   | (252,420 | ) | 6,467,890 |   | 6,218,043 |   |
| Comerc. Energía  del Mercosur S.A. (3)           |       | 45.00                                   | %          | 6,305,400                                       |       | 45.00                   | %          | 7,947,453                                               |       | 3,973,569 |   | 3,576,354 |   | 647,823 |   | 600,047 |   | 49,821 |   |
| Transmisora  Eléctrica de Quillota Ltda.         |       | 50.00                                   | %          | —                                          |       | 50.00                   | %          | 6,335,853                                               |       | 2,985,987 |   | 3,167,927 |   | 164,770 |   | 133,328 |   | 171,589 |   |
| Endesa Brasil  S.A. (1)                               |       | 0.00                                    | %          | 67,256,360                                      |       | 40.45                   | %          | 913,850,458                                             |       | — |   | 369,679,575 |   | — |   | — |   | 12,857,976 |   |
| Gas Atacama S.A.                                      |       | 0.01                                    | %          | 1,147                                           |       | 0.01                    | %          | 166,528,279                                             |       | 1,988 |   | 1,910 |   | 4 |   | 148 |   | 139 |   |
| Electrogas S.A.                                       |       | 0.02                                    | %          | 85                                              |       | 0.02                    | %          | 16,185,548                                              |       | 3,668 |   | 3,439 |   | 1,347 |   | 1,107 |   | 898 |   |
| Distrilec  Inversora S.A                              |       | 0.89                                    | %          | 4,416,141                                       |       | 0.89                    | %          | 261,401,265                                             |       | 2,712,764 |   | 2,319,847 |   | (143,858 | ) | (88,768 | ) | (87,726 | ) |
| Consorcio ARA—Ingendesa  Ltda. (4)               |       | 50.00                                   | %          | —                                          |       | 50.00                   | %          | 845,880                                                 |       | 276,365 |   | 422,940 |   | 53,507 |   | 210,102 |   | 146,577 |   |
| Sociedad Consorcio Ingendesa ARA Ltda. (4)            |       | 50.00                                   | %          | —                                          |       | 50.00                   | %          | 134,047                                                 |       | 5,557 |   | 67,024 |   | — |   | 5,038 |   | 61,466 |   |
| Consorcio  Ingendesa—Minmetal Ltda (4)           |       | 50.00                                   | %          | —                                          |       | 50.00                   | %          | 179,408                                                 |       | 42,567 |   | 89,704 |   | — |   | 41,469 |   | 107,521 |   |
| Central Térmica  San Martín S.A. (5)        |       | 0.00                                    | %          | 500,006                                         |       | 23.13                   | %          | 84,198                                                  |       | — |   | 19,475 |   | — |   | — |   | — |   |
| Central Térmica  Manuel Belgrano S.A. (5)        |       | 0.00                                    | %          | 500,006                                         |       | 23.13                   | %          | 84,198                                                  |       | — |   | 19,475 |   | — |   | — |   | — |   |
| Total                                                 |       |                                    |       |                                            |       |                    |       |                                                    |       | 173,065,074 |   | 470,061,843 |   | 18,444,898 |   | 19,894,332 |   | 13,569,502 |   |

 

----

| (1) |   | See  note 10(c) (iii.)                                                                                                                                                                                                                      |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | On  November 29, 2005, the Company transferred the assets of Inversiones  Eléctricas Quillota S.A to Endesa Chile S.A. (individual entity) through the  dissolution of Inversiones Eléctricas Quillota S.A See Note 10 (f) (iii.) |
| (3) |   | This  company is an unconsolidated related party of the subsidiary Endesa Argentina                                                                                                                                                         |
| (4) |   | These  companies are unconsolidated related parties of the subsidiary Ingendesa                                                                                                                                                             |
| (5) |   | These  company are unconsolidated related parties of the subsidiaries Endesa Costanera  S.A. and Hidroeléctrica El Chocón S.A. founded on December 31, 2005.                                                                      |

 

F-36

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**10.****     ****Investment in related companies, continued:**

 

b.      Constitution of companies

 

(i.)     On April 18, 2005, Endesa-Chile and itssubsidiary Enigesa formally constituted a new subsidiary which was named EndesaEco S.A., whose main objective is to promote and develop projects of renewableenergy. The shareholders’ equity of the new subsidiary is ThCh$ 580,000 dividedin 5,800,000 nominative shares without nominal value. Endesa-Chile subscribed5,799,420 shares which represent 99.99% of the paid-in capital and effectivelypaid 1,799,820 shares for the sum of ThCh$ 179,982; the company’s subsidiaryEnigesa subscribed 580 shares representative of 0.01% of the paid-in capitaland paid 180 shares for a sum of ThCh$ 18. The unpaid balance will be paidproportionally by each shareholder within three years from the constitutiondate.

 

c.      Reorganizations of entities under commoncontrol

 

(i.)     As of December 29, 2003, Compañía EléctricaCono Sur S.A. sold 3,150,000 shares of Atacama Finance to Gas Atacama S.A. forthe price of US$4,400,000

 

(ii.)    As of December 29, 2003, Compañía EléctricaCono Sur S.A. sold 5,000 shares of Enegex Co. to Gas Atacama S.A. for the priceof US$5,000.

 

(iii.)   Endesa Brasil S.A. was formed on June 10,2005 as a reorganization of entities under common control. Its main objectiveis to be the holding company of other companies and societies that are director indirect participants in the electric sector, including transmission,distribution, generation and commercialization of electric energy in Brazil andoffshore. Endesa Brasil was created as an energy holding concentrating all theelectric assets of Endesa S.A.’s group in Brazil.

 

Endesa Brasil holds shares in the following companies: Companhia deInterconexão Energética—CIEN, Central Geradora Termelétrica Fortaleza—CGTF,Companhia de Energética do Ceará—COELCE, Ampla Energia e Serviços S.A., AmplaInvestimentos e Serviços S.A., Investluz S.A. and Centrais Elétricas CachoeiraDourada S.A—CDSA.

 

With respect to the above mentioned companies, all the shares formerlycontrolled by companies belonging to the Endesa-Chile S.A. group weretransferred to Endesa Brasil S.A. The contributions were made by Enersis,Endesa-Chile, Chilectra and Endesa Internacional. Endesa-Chile, through itssubsidiaries Edegel S.A. and Compañía Eléctrica Cono Sur S.A. contributed theirinvestments in Cachoeira Dourada S.A. (99.61%) and CIEN (45%), in exchange forparticipation in Endesa Brasil as follows: Edegel S.A. 4.18% and CompañíaEléctrica Cono Sur S.A. 36.27%.

 

The economic participation of the Company in Endesa Brasil S.A. is37.85%.

 

(iv.)   On September 6, 2005, the Company acquired189,000 shares of Ingendesa S.A. for the amount of ThCh$ 60,606, increasing itsdirect participation in that company to 98.75%.

 

(v.)    On November 22, 2005, the Company sold 1share of Compañía Eléctrica San Isidro S.A. to Endesa Inversiones GeneralesS.A., for the amount of ThCh$ 14.

 

All the transfers were recorded at book value of therelated investments.

 

F-37

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**10.****     ****Investment in related companies, continued:**

 

d.      Acquisitions

 

(i.)     On August 11, 2005, the Company and itssubsidiary Endesa Inversiones Generales S.A. acquired 99.999% and 0.001% ofInversiones Lo Venecia Ltda., for an amount of ThCh$ 8,360,472 and ThCh$ 82,respectively. Lo Venecia Ltda was the owner of 25.001% of the paid-in capitalof Compañía Eléctrica San Isidro S.A. As a result, Endesa-Chile now directlyand indirectly owns 100% of the shares of Compañía Eléctrica San Isidro S.A.

 

In accordance with Technical Bulletin No.72 of Chilean Association ofAccountants and the standards established in the Circular No.1697 of theChilean Superintendency of Securities and Insurance, the Company recorded theacquisition under the purchase method, valuing the proportion of all assets andliabilities acquired of Compañía Eléctrica San Isidro S.A. from third partiesas of July 31, 2005 at their respective fair values.

 

The difference determined by the Company between the fair value and thecarrying value of Compañía Eléctrica San Isidro S.A. shareholders’ equity as ofthe acquisition date amounted to ThCh$ 6,645,776, and it is due to the highereconomic value of property, plant and equipment compared to their carryingvalue. This amount assigned to the property, plant and equipment will bedepreciated over 18 years, which was the estimated remaining useful life ofthese assets at the time of acquisition.

 

e.      Sales of subsidiary shares during the yearended December 31, 2003, 2004 and 2005:

 

(i.)     As of June 23, 2003, the Company sold330,939,522 shares of Infrastructura Dos Mil S.A. for ThCh$ 41,517,188 and3,741 shares of Sociedad Concesionaria Autopista del Sol S.A. for ThCh$42,632which presented the Company’s total participation in these entities .

 

f.       Dissolution of related parties:

 

(i.)     As of October 3, 2005 Sociedad LajasInversoras S.A., owner of 99.61% of the Brazilian company Cachoeira DouradaS.A. was dissolved and liquidated. The assets of the company were allocatedamong all shareholders proportionally to their participation, meaning that theCompany’s indirect subsidiary Edegel S.A. received 11.47% of these assets andthe Company’s subsidiary Compañía Eléctrica Cono Sur S.A. received 88.53% ofthese assets.

 

(ii.)    On November 29, 2005, the Company acquired0.001% of Inversiones Lo Venecia Ltda. for the amount of ThCh$ 83. As a resultof this purchase, Inversiones Lo Venecia Ltda. ceased to exist as a separatelegal entity, given that the Company already owned the remaining 99.999% of itsshares. All assets and liabilities owned by Lo Venecia Ltda. were transferredto Endesa Chile S.A..

 

(iii.)   On November 29, 2005, the Company transferredthe assets of Inversiones Eléctricas Quillota S.A. to Endesa Chile S.A.(individual entity) through the dissolution of Inversiones Eléctricas Quillota

 

F-38

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**10.****     ****Investment in related companies, continued:**

 

g.             Net investment hedge

 

Inaccordance with Technical Bulletin No. 64 of the Chilean Association ofAccountants for the years ended December 31, 2003, 2004 and 2005, the Companyhas designated long-term liabilities denominated in foreign currencies ashedges against net investments in foreign countries, when the functionalcurrency of those investments is the same currency in which the liability isdenominated. The Company recorded foreign exchange gains and losses on thoseliabilities as cumulative translation adjustments in shareholders’ equity, andin this way, for accounting purposes, they act as economic hedges of theforeign exchange risk for accounting purposes affecting the investments. To theextent that liabilities exceed the total investment, the gain or loss on theineffective portion of the hedging liability is recorded in current income. Asof December 31, 2005 the corresponding investments and associated liabilitiesare as follows:

 
| ** **                                     | ** ** | **As of December 31, 2005** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|
| **Company**                                    | ** ** | **Country of Origin**                 | ** ** | **Investment** | ** ** | **Reporting  Currency** | ** ** | **Associated  Liability** | ** ** |
| ** **                                     | ** ** | ** **                                      | ** ** | **ThCh$** | ** ** | ** ** | ** ** | **ThCh$** | ** ** |
|                                           |       |                                            |       |   |   |   |   |   |   |
| Central Hidroeléctrica Betania S.A.       |       | Colombia                                        |       | 312,892,596 |   | US$ |   | 235,555,049 |   |
| Endesa Brasil S.A.                             |       | Brazil                                          |       | 331,439,822 |   | US$ |   | 362,914,875 |   |
| Edegel S.A.                                    |       | Peru                                            |       | 150,119,688 |   | US$ |   | 115,075,062 |   |
| Hidroeléctrica El Chocón S.A.        |       | Argentina                                       |       | 156,439,049 |   | US$ |   | 72,687,324 |   |
| Comercializadora de Energia del Mercosur  S.A. |       | Argentina                                       |       | 3,576,354 |   | US$ |   | 2,528,355 |   |
| Endesa Costanera S.A.                          |       | Argentina                                       |       | 80,978,734 |   | US$ |   | 51,581,304 |   |
| Distrilec Inversora S.A.                       |       | Argentina                                       |       | 2,319,847 |   | US$ |   | 1,158,414 |   |
| Total                                          |       |                                            |       | 1,037,766,090 |   |   |   | 841,500,383 |   |

 
| ** **                                                     | ** ** | **As of December 31, 2004** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **Company**                                                    | ** ** | **Country of Origin**                 | ** ** | **Investment** | ** ** | **Reporting  Currency** | ** ** | **Associated  Liability** | ** ** |
| ** **                                                     | ** ** | ** **                                      | ** ** | **ThCh$** | ** ** | ** ** | ** ** | **ThCh$** | ** ** |
| ** **                                                     | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Central  Hidroeléctrica Betania S.A.            |       | Colombia                                        |       | 344,485,016 |   | US$ |   | 263,175,047 |   |
| Central  Hidroeléctrica Cachoeira Dourada S.A.            |       | Brazil                                          |       | 345,901,326 |   | US$ |   | 338,077,616 |   |
| Edegel  S.A.                                                   |       | Peru                                            |       | 171,059,552 |   | US$ |   | 100,736,534 |   |
| Compañía de Interconexión  Energética S.A. |       | Brazil                                          |       | 54,730,908 |   | US$ |   | 41,689,615 |   |
| Hidroeléctrica El Chocón  S.A.                       |       | Argentina                                       |       | 174,029,713 |   | US$ |   | 80,597,990 |   |
| Comercializadora  de Energia del Mercosur S.A.                 |       | Argentina                                       |       | 3,973,569 |   | US$ |   | 2,605,244 |   |
| Endesa  Costanera S.A.                                         |       | Argentina                                       |       | 96,282,698 |   | US$ |   | 58,052,496 |   |
| Distrilec  Inversora S.A.                                      |       | Argentina                                       |       | 2,712,764 |   | US$ |   | 1,305,258 |   |
| Total                                                          |       |                                            |       | 1,193,175,546 |   |   |   | 886,239,800 |   |

 

F-39

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**10.****     ****Investment in related companies, continued:**

 
| ** **                                                     | ** ** | **As of December 31, 2003** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **Company**                                                    | ** ** | **Country of Origin**                 | ** ** | **Investment** | ** ** | **Reporting  Currency** | ** ** | **Associated Liability** | ** ** |
| ** **                                                     | ** ** | ** **                                      | ** ** | **ThCh$** | ** ** | ** ** | ** ** | **ThCh$** | ** ** |
| ** **                                                     | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Central  Hidroeléctrica Betania S.A.                      | ** ** | Colombia                                        |       | 412,096,954 |   | US$ |   | 292,418,822 | ** ** |
| Central  Hidroeléctrica Cachoeira Dourada S.A.            | ** ** | Brazil                                          |       | 380,600,073 |   | US$ |   | 430,156,888 | ** ** |
| Edegel  S.A.                                                   | ** ** | Peru                                            |       | 191,886,939 |   | US$ |   | 175,698,452 | ** ** |
| Compañía  de Interconexión Energética S.A. | ** ** | Brazil                                          |       | 58,239,748 |   | US$ |   | 51,176,941 | ** ** |
| Hidroeléctrica  El Chocón S.A.                       | ** ** | Argentina                                       |       | 201,494,117 |   | US$ |   | 86,680,806 | ** ** |
| Comercializadora  de Energia del Mercosur S.A.                 | ** ** | Argentina                                       |       | 3,683,670 |   | US$ |   | 2,412,172 | ** ** |
| Endesa  Costanera S.A.                                         | ** ** | Argentina                                       |       | 98,098,826 |   | US$ |   | 61,204,036 | ** ** |
| Distrilec  Inversora S.A.                                      | ** ** | Argentina                                       |       | 3,059,093 |   | US$ |   | 1,425,259 | ** ** |
| Total                                                          | ** ** |                                            |       | 1,349,159,420 |   |   |   | 1,101,173,376 | ** ** |

 

**11.****     ****Investments in other companies:**

 

Investmentsin other companies as of December 31, 2004 and 2005 are as follows:

 
| ** **                                        | ** ** | **Number  of** |       | **Percentage** |       | **As  of December 31,** | ** ** |
|---------------------------------------------------|------------|----------------|------------|----------------|------------|-------------------------|------------|
| **Company**                                       | ** ** | **shares**     |       | **owned**      |       | **2004**                |       | **2005** | ** ** |
| ** **                                        | ** ** | ** **     | ** ** | **%**          | ** ** | **ThCh$**               | ** ** | **ThCh$** | ** ** |
| Club  de la Banca y Comercio                      | ** ** | 11             |       | —         |       | 2,326                   |       | 1,853 | ** ** |
| Club  Empresarial                                 | ** ** | 1              |       | 1.00           | %          | 5,683                   |       | 5,255 | ** ** |
| Empresa  Eléctrica de Aysen S.A              | ** ** | 2,516,231      |       | —         |       | 2,121,474               |       | 2,123,831 | ** ** |
| Cooperativa  Eléctrica de Chillán Ltda. | ** ** | —         |       | —         |       | 13,844                  |       | 13,844 | ** ** |
| CDEC-SIC  Ltda.                                   | ** ** | —         |       | 23.16          | %          | 221,460                 |       | 221,458 | ** ** |
| CDEC-SING  Ltda.                                  | ** ** | —         |       | 7.69           | %          | 106,885                 |       | 106,886 | ** ** |
| Empresa  Eléctrica de Bogotá S.A.       | ** ** | 1,966,881      |       | 1.69           | %          | 19,518,364              |       | 15,235,088 | ** ** |
| Financiera  Eléctrica Nacional S.A.          | ** ** | 4,072          |       | 0.10           | %          | 119,859                 |       | 106,375 | ** ** |
| Electrificadora  de la Costa S.A.                 | ** ** | 13,590,296     |       | 0.14           | %          | 25,747                  |       | 22,850 | ** ** |
| Electrificadora  del Caribe S.A.                  | ** ** | 85,568,116     |       | 0.10           | %          | 1,379,483               |       | 1,224,288 | ** ** |
| Total                                             | ** ** |           |       |           |       | 23,515,125              |       | 19,061,728 | ** ** |

 

 

F-40

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**12.****     ****Goodwill and Negative Goodwill:**

 

a.      Goodwill as of December 31, 2004 and 2005, isas follows:

 
| ** **                    | ** ** | **As of December 31,** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | **Amortization**                      | ** ** | **Net Balance** | ** ** |
| **Company**                   | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                          |       |                                  |       |   |   |   |   |   |   |   |   |
| Emgesa S.A.                   |       | 1,418,121                             |       | 1,298,721 |   | 1,152,613 |   | 16,665,102 |   | 13,638,138 |   |
| Gasoducto Atacama Chile Ltda. |       | 5,119                                 |       | 5,119 |   | 5,118 |   | 72,512 |   | 67,394 |   |
| Edegel S.A.                   |       | 35,993                                |       | 32,963 |   | 29,255 |   | 423,025 |   | 346,179 |   |
| Pangue S.A.                   |       | 179,390                               |       | 179,390 |   | 179,390 |   | 3,154,272 |   | 2,974,882 |   |
| Total                         |       | 1,638,623                             |       | 1,516,193 |   | 1,366,376 |   | 20,314,911 |   | 17,026,593 |   |

 

b.      Negative goodwill as of December 31, 2004 and2005, is as follows:

 
| ** **                              | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **Amortization**                      | ** ** | **Net Balance** | ** ** |
| **Company**                             | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                    |       |                                  |       |   |   |   |   |   |   |   |   |
| Edegel S.A.                             |       | 9,032,781                             |       | 8,272,264 |   | 7,341,614 |   | 34,148,458 |   | 22,965,058 |   |
| Endesa Costanera S.A.                   |       | 450,319                               |       | 2,797,173 |   | 2,482,484 |   | 13,286,585 |   | 9,309,327 |   |
| Central Hidroeléctrica Betania S.A |       | 6,847,597                             |       | 5,406,793 |   | 5,304,393 |   | 7,856,919 |   | 1,668,604 |   |
| Emgesa S.A.                             |       | 223,847                               |       | 205,001 |   | 181,938 |   | 2,662,120 |   | 2,180,688 |   |
| Total                                   |       | 16,554,544                            |       | 16,681,231 |   | 15,310,429 |   | 57,954,082 |   | 36,123,677 |   |

 

F-41

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**13.****     ****Other intangibles:**

 

Thedetail of other intangibles as of each year-end is as follows:

 
| ** **                | ** ** | **Estimated  Useful  life  (months)** | ** ** | **As of December 31,** | ** **                    |
|---------------------------|------------|---------------------------------------|------------|---------------------------------------|-------------------------------|
| ** **                | ** ** | ** **                            | **2004**   | ** **                            | **2005**                      | ** ** |
| ** **                | ** ** | ** **                            | **Total**  | ** **                            | **Accumulated  Amortization** | ** ** | **Net Balance** | ** ** | **Total** | ** ** | **Accumulated  Amortization** | ** ** | **Net Balance** | ** ** |
| ** **                | ** ** | ** **                            | ** ** | **ThCh$**                             | ** **                    | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| ** **                | ** ** | ** **                            | ** ** | ** **                            | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Easements                 |       | 24                                    |       | 2,201,425                             |                          | (1,449,226 | ) | 752,199 |   | 2,683,754 |   | (1,946,073 | ) | 737,681 |   |
| Water rights              |       | 1,440                                 |       | 15,151,908                            |                          | (1,294,113 | ) | 13,857,795 |   | 13,447,281 |   | (1,513,598 | ) | 11,933,683 |   |
| Salex-fourth line Comahue |       | 60                                    |       | 9,445,620                             |                          | (4,462,085 | ) | 4,983,535 |   | 8,383,475 |   | (4,406,988 | ) | 3,976,487 |   |
| Software                  |       | 36                                    |       | 2,282,369                             |                          | (1,462,774 | ) | 819,595 |   | 807,579 |   | (697,456 | ) | 110,123 |   |
| Other                     |       | —                                |       | 5,751                                 |                          | (1,709 | ) | 4,042 |   | 576,918 |   | (336,203 | ) | 240,715 |   |
| Total                     |       |                                  |       | 29,087,073                            |                          | (8,669,907 | ) | 20,417,166 |   | 25,899,007 |   | (8,900,318 | ) | 16,998,689 |   |

 

Amortizationexpense for the years ended December 31, 2003, 2004 and 2005 amounted to ThCh$1,740,369, ThCh$ 1,451,970 and ThCh$ 1,199,735, respectively.

 

**14.****     ****Other assets:**

 

Otherassets as of each year-end are as follows:

 
| ** **                                                        | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                        | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** |
|                                                              |       |                                  |       |   |   |
| Bond discount                                                     |       | 12,786,252                            |       | 11,151,767 |   |
| Reimbursable contributions                                        |       | 3,340,774                             |       | 2,796,647 |   |
| Deferred commissions on loans and lines of  credit                |       | 11,380,805                            |       | 6,866,062 |   |
| Minimum tax on productive assets  (Argentina)                     |       | 7,474,842                             |       | 10,682,158 |   |
| Bond issuance costs                                               |       | 5,288,401                             |       | 4,722,861 |   |
| Unrealized loss on derivative contracts                           |       | 832,013                               |       | 134,855 |   |
| Software and licenses                                             |       | 108,191                               |       | — |   |
| Investment funds                                                  |       | 7,602,923                             |       | — |   |
| Investment “Empresa Eléctrica de Bogotá”  (1) |       | 44,003,517                            |       | 38,784,463 |   |
| Other                                                             |       | 298,399                               |       | 1,008,294 |   |
| Total                                                             |       | 93,116,117                            |       | 76,147,107 |   |

 

----

(1)   As a result of a reconciliation agreementsigned on October 5, 2004, Corporación Financiera del Valle (Corfivalle) willwithdraw its participation in Central Hidroeléctrica de Betania S.A. E.S.P.through an exchange of assets between Grupo Corfivalle and the Company. Thisagreement will be formalized during 2006 when the legal processes defined byboth parts are completed. Afterwards, the assets will be transferred.

 

Inthis transaction, the Company will transfer Betania S.A. E.S.P.’s electricsubstation as well as 3.81% of its participation in Empresa de Energía deBogotá S.A. E.S.P. to Corfivalle in exchange for Corfivalle’s 14.3% participationin Central Hidroeléctrica de Betania S.A. E.S.P.

 

Theparties, understanding that the measures necessary to complete the assettransfer will occur gradually, have granted usufruct of political and economicrights of the aforementioned assets, which was exchanged on January 1, 2004.Hence, the Company’s 3.81% participation in Empresa Eléctrica de Bogotá S.A.,which is subject to complete execution of this agreement, is shown under otherassets.

 

F-42

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**15.****     ****Debt due to banks and financial institutions:**

 

a.      Short-term debt due to banks and financialinstitutions:

 

InFebruary 2004, the Company obtained a loan of US$ 250 million in order toprepay debt acquired in 2003. In November 2004, the Company obtained a new loanof US$ 250 million to refinance the loan obtained in February 2004. TheCompany’s new loan’s interest rate is LIBOR + 0.375%. The loan matures inNovember 2010.

 
| ** **                                    | ** ** | **Foreign Currency** | ** ** | **Local Currency**                | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|----------------------------------------|------------|------------|------------|
| ** **                                    | ** ** | **US$**                   | ** ** | **Other Foreign Currencies** | ** ** | **Ch$**    | ** ** | **Total** | ** ** |
| **Financial Institution**                | ** ** | **2004**                  | ** ** | **2005**                               | ** ** | **2004**   | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **ThCh$**                 | ** ** | **ThCh$**                              | ** ** | **ThCh$**  | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                          |       |                      |       |                                   |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Banco BBVA Bhif                               |       | —                    |       | —                                 |       | —     |       | — |   | 1 |   | 5 |   | 1 |   | 5 |   |
| Banco Barings                                 |       | —                    |       | 592,963                                |       | —     |       | — |   | — |   | — |   | — |   | 592,963 |   |
| Banco Continental                             |       | 5,916,169                 |       | 2,307,196                              |       | 6,217,198  |       | — |   | — |   | — |   | 12,133,367 |   | 2,307,196 |   |
| Banco Crédito e Inversiones              |       | —                    |       | —                                 |       | —     |       | 557,241 |   | — |   | — |   | — |   | 557,241 |   |
| Banco Ciudad de Buenos Aires                  |       | 2,093,894                 |       | —                                 |       | —     |       | 2,072,549 |   | — |   | — |   | 2,093,894 |   | 2,072,549 |   |
| Banco de Crédito e Inversiones Perú |       | —                    |       | —                                 |       | 3,803,913  |       | — |   | — |   | — |   | 3,803,913 |   | — |   |
| Banco Wiese                                   |       | —                    |       | —                                 |       | 14,249     |       | — |   | — |   | — |   | 14,249 |   | — |   |
| Banco de Galicia y Buenos Aires               |       | 629,438                   |       | 559,138                                |       | —     |       | — |   | — |   | — |   | 629,438 |   | 559,138 |   |
| Banco Ganadero                                |       | 8,990,976                 |       | —                                 |       | 17,177,053 |       | — |   | — |   | — |   | 26,168,029 |   | — |   |
| Banco Itau                                    |       | 1,499,102                 |       | 1,192,075                              |       | —     |       | — |   | — |   | — |   | 1,499,102 |   | 1,192,075 |   |
| Banco Lloyds                                  |       | 1,348,384                 |       | —                                 |       | —     |       | — |   | — |   | — |   | 1,348,384 |   | — |   |
| Banco Provincia de Buenos Aires               |       | 578,043                   |       | 1,216,163                              |       | —     |       | — |   | — |   | — |   | 578,043 |   | 1,216,163 |   |
| Banco Santander                               |       | 1,159,243                 |       | —                                 |       | 10,391,139 |       | 2,895,113 |   | — |   | — |   | 11,550,382 |   | 2,895,113 |   |
| Banco Santander Santiago                      |       | —                    |       | —                                 |       | —     |       | — |   | 2,513,835 |   | — |   | 2,513,835 |   | — |   |
| Interbank                                     |       | —                    |       | —                                 |       | 2,772      |       | — |   | — |   | — |   | 2,772 |   | — |   |
| Bank Boston                                   |       | 8,919,997                 |       | —                                 |       | 707,695    |       | — |   | — |   | — |   | 9,627,692 |   | — |   |
| Citibank                                      |       | 14,354,876                |       | —                                 |       | —     |       | 336,713 |   | — |   | — |   | 14,354,876 |   | 336,713 |   |
| Davivienda                                    |       | —                    |       | —                                 |       | 3,413,755  |       | — |   | — |   | — |   | 3,413,755 |   | — |   |
| Banco Bladex                                  |       | —                    |       | 602,700                                |       | —     |       | — |   | — |   | — |   | — |   | 602,700 |   |
| Banco de Bogotá                          |       | —                    |       | —                                 |       | 9,699,405  |       | — |   | — |   | — |   | 9,699,405 |   | — |   |
| Total                                         |       | 45,490,122                |       | 6,470,235                              |       | 51,427,179 |       | 5,861,616 |   | 2,513,836 |   | 5 |   | 99,431,137 |   | 12,331,856 |   |
| Total principal                               |       | 45,286,384                |       | 6,368,122                              |       | 50,965,768 |       | 5,463,668 |   | 2,513,836 |   | — |   | 98,765,988 |   | 11,831,790 |   |
|                                          |       |                      |       |                                   |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average                              |       | 3.41                      | %          | 5.85                                   | %          | 7.06       | %          | 8.71 | % | 9.00 | % | 1.00 | % | 5.44 | % | 7.21 | % |

 

F-43

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**15.****     ****Debt due to banks and financial institutions, continued:**

 
| ** **                             | ** ** | **As of December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|
| ** **                             | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **%**                                 | ** ** | **%** | ** ** |
|                                   |       |                                  |       |   |   |
| Percentage of debt in foreign currency |       | 97.47                                 | %          | 100.00 | % |
| Percentage of debt in local currency   |       | 2.53                                  | %          | 0.00 | % |
| Total                                  |       | 100.00                                | %          | 100.00 | % |

 

b.      Current portion of long-term debt due tobanks and financial institutions:

 
| ** **                            | ** ** | **Foreign Currency** | ** ** | **Local Currency**                | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------------------|------------|----------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **US$**                   | ** ** | **Other Foreign Currencies** | ** ** | **Ch$**    | ** ** | **Total** | ** ** |
| **Financial Institution**        | ** ** | **2004**                  | ** ** | **2005**                               | ** ** | **2004**   | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **ThCh$**                 | ** ** | **ThCh$**                              | ** ** | **ThCh$**  | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                  |       |                      |       |                                   |       |       |       |   |   |   |   |   |   |   |   |   |   |
| ABN Amro Bank                         |       | 4,900,850                 |       | —                                 |       | —     |       | — |   | — |   | — |   | 4,900,850 |   | — |   |
| Bancafe                               |       | —                    |       | —                                 |       | 1,290,949  |       | 1,178,539 |   | — |   | — |   | 1,290,949 |   | 1,178,539 |   |
| Bancolombia                           |       | —                    |       | —                                 |       | 3,442,531  |       | 3,142,772 |   | — |   | — |   | 3,442,531 |   | 3,142,772 |   |
| Banesto                               |       | —                    |       | 4,301,572                              |       | —     |       | — |   | — |   | — |   | — |   | 4,301,572 |   |
| Banco Continental                     |       | —                    |       | —                                 |       | —     |       | 3,856 |   | — |   | — |   | — |   | 3,856 |   |
| Bndes                                 |       | —                    |       | —                                 |       | 1,861,174  |       | — |   | — |   | — |   | 1,861,174 |   | — |   |
| Banco Bilbao Vizcaya Argentaria S.A   |       | 5,890                     |       | —                                 |       | —     |       | — |   | — |   | — |   | 5,890 |   | — |   |
| Banco Estado                          |       | —                    |       | —                                 |       | —     |       | — |   | 1,761,617 |   | 1,788,047 |   | 1,761,617 |   | 1,788,047 |   |
| Banco de Crédito                 |       | —                    |       | —                                 |       | —     |       | 2,972 |   | — |   | — |   | — |   | 2,972 |   |
| Banco Mediocredito Italiano           |       | —                    |       | —                                 |       | 1,852,156  |       | 1,803,488 |   | — |   | — |   | 1,852,156 |   | 1,803,488 |   |
| Banco Nationale París            |       | 3,904,240                 |       | 3,422,025                              |       | —     |       | — |   | — |   | — |   | 3,904,240 |   | 3,422,025 |   |
| Banco Santander Central Hispano       |       | 5,890                     |       | —                                 |       | —     |       | — |   | — |   | — |   | 5,890 |   | — |   |
| Bank of América                  |       | 15,980,007                |       | —                                 |       | —     |       | — |   | — |   | — |   | 15,980,007 |   | — |   |
| Bank of Tokio Mitsubishi              |       | 5,584,839                 |       | —                                 |       | 987,872    |       | — |   | — |   | — |   | 6,572,711 |   | — |   |
| Caja Madrid Miami Agency              |       | 5,890                     |       | 18,160                                 |       | —     |       | — |   | — |   | — |   | 5,890 |   | 18,160 |   |
| Citibank N.A., Nassau, Bahamas Branch |       | 5,890                     |       | —                                 |       | —     |       | — |   | — |   | — |   | 5,890 |   | — |   |
| Conavi                                |       | —                    |       | —                                 |       | 2,151,581  |       | 1,964,233 |   | — |   | — |   | 2,151,581 |   | 1,964,233 |   |
| Colpatria                             |       | —                    |       | —                                 |       | 860,632    |       | 785,693 |   | — |   | — |   | 860,632 |   | 785,693 |   |
| Corfinsura                            |       | —                    |       | —                                 |       | 3,442,531  |       | 3,142,772 |   | — |   | — |   | 3,442,531 |   | 3,142,772 |   |
| Granahorrar                           |       | —                    |       | —                                 |       | —     |       | 1,178,539 |   | — |   | — |   | — |   | 1,178,539 |   |
| Davivienda                            |       | —                    |       | —                                 |       | 2,582,586  |       | 2,369,515 |   | — |   | — |   | 2,582,586 |   | 2,369,515 |   |
| Export Development Corporation        |       | 1,820,481                 |       | 1,698,110                              |       | —     |       | — |   | — |   | — |   | 1,820,481 |   | 1,698,110 |   |
| Granahorrar                           |       | —                    |       | —                                 |       | 1,290,949  |       | — |   | — |   | — |   | 1,290,949 |   | — |   |
| J.P. Morgan Chase Bank                |       | 32,089,086                |       | 91,823                                 |       | —     |       | — |   | — |   | — |   | 32,089,086 |   | 91,823 |   |
| Kreditanstalt für Wiederaufbau   |       | 333,513                   |       | 292,517                                |       | —     |       | — |   | — |   | — |   | 333,513 |   | 292,517 |   |
| Barings Bank                          |       | 1,208,637                 |       | —                                 |       | —     |       | — |   | — |   | — |   | 1,208,637 |   | — |   |
| Skandinaviska Enskilda Banken         |       | 1,924,299                 |       | 1,702,107                              |       | —     |       | — |   | — |   | — |   | 1,924,299 |   | 1,702,107 |   |
| Total                                 |       | 67,769,512                |       | 11,526,314                             |       | 19,762,961 |       | 15,572,379 |   | 1,761,617 |   | 1,788,047 |   | 89,294,090 |   | 28,886,740 |   |
| Total Principal                       |       | 66,852,540                |       | 10,716,433                             |       | 16,879,863 |       | 13,236,522 |   | 1,672,500 |   | 1,788,047 |   | 85,404,903 |   | 25,741,002 |   |

 

F-44

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**15.****     ****Debt due to banks and financial institutions, continued:**

 
| ** **                             | ** ** | **As of December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|
| ** **                             | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **%**                                 | ** ** | **%** | ** ** |
| ** **                             | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Percentage of debt in foreign currency |       | 98.03                                 | %          | 93.81 | % |
| Percentage of debt in local currency   |       | 1.97                                  | %          | 6.19 | % |
| Total                                  |       | 100.00                                | %          | 100.00 | % |

 

F-45

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**15.****     ****Debt due to banks and financial institutions, continued:**

 

c.      Long-term portion of debt due to banks andfinancial institutions:

 
| ** **                             | ** ** | ** **    | ** ** | **As of  December  31, 2004** | ** ** | **As of December 31, 2005**       | ** ** |
|----------------------------------------|------------|---------------|------------|-----------------------------------------|------------|-------------------------------------------------------|------------|
| **Financial Institution**         | ** ** | **Currency**  | ** ** | **Long-term  portion**                  | ** ** | **After 1  year but  within 2  years** | ** ** | **After 2  years but  within 3  years** | ** ** | **After 3  years but  within 5  years** | ** ** | **After 5  years but  within 10  years** | ** ** | **After 10  years** | ** ** | **Total long-  term  portion** | ** ** | **Annual  interest  rate** | ** ** |
| ** **                             | ** ** | ** **    | ** ** | **ThCh$**                               | ** ** | **ThCh$**                                             | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **%** | ** ** |
|                                   |       |          |       |                                    |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| ABN Amro Bank                          |       | US$           |       | —                                  |       | —                                                |       | — |   | 2,776,042 |   | — |   | — |   | 2,776,042 |   | 4.91 | % |
| Instituto de  Crédito Oficial     |       | US$           |       | —                                  |       | —                                                |       | — |   | 2,220,833 |   | — |   | — |   | 2,220,833 |   | 4.91 | % |
| Bancafe                                |       | $ Colom  |       | 2,416,431                               |       | —                                                |       | — |   | 1,121,827 |   | — |   | — |   | 1,121,827 |   | 12.17 | % |
| Bancolombia                            |       | $ Colom  |       | 6,443,813                               |       | —                                                |       | — |   | 2,991,539 |   | — |   | — |   | 2,991,539 |   | 12.17 | % |
| Banesto                                |       | US$           |       | 11,760,153                              |       | 3,131,132                                             |       | 1,565,566 |   | 1,565,566 |   | — |   | — |   | 6,262,264 |   | 6.83 | % |
| Bndes                                  |       | Rs            |       | 5,424,720                               |       | —                                                |       | — |   | — |   | — |   | — |   | — |   | 0.00 | % |
| Banco Bilbao  Viscaya Argentaria       |       | US$           |       | 36,091,650                              |       | —                                                |       | — |   | — |   | — |   | — |   | — |   | 0.00 | % |
| Banco Estado                           |       | $ Readj. |       | 2,804,543                               |       | 951,856                                               |       | — |   | — |   | — |   | — |   | 951,856 |   | 9.00 | % |
| Banco Nationales  de Paris             |       | US$           |       | 9,808,204                               |       | 1,821,926                                             |       | 2,339,263 |   | 2,204,304 |   | — |   | — |   | 6,365,493 |   | 5.78 | % |
|                                   |       | US$           |       | 9,447,761                               |       | 838,487                                               |       | 838,487 |   | 1,676,974 |   | 4,192,436 |   | — |   | 7,546,384 |   | 5.98 | % |
| Banco Medio  Crédito              |       | $ Arg    |       | 10,075,779                              |       | 1,786,956                                             |       | 1,786,956 |   | 3,573,912 |   | 893,301 |   | — |   | 8,041,125 |   | 1.75 | % |
| Banco Santander  Central Hispano       |       | US$           |       | 36,091,650                              |       | —                                                |       | — |   | 8,328,125 |   | — |   | — |   | 8,328,125 |   | 4.91 | % |
| Bank Of América                   |       | US$           |       | 8,812,570                               |       | —                                                |       | — |   | — |   | — |   | — |   | — |   | 0.00 | % |
| Bank Of Tokio  Mitsubishi Ltda         |       | US$           |       | —                                  |       | —                                                |       | — |   | 18,988,125 |   | — |   | — |   | 18,988,125 |   | 4.91 | % |
| Barings Bank                           |       | US$           |       | 646,762                                 |       | —                                                |       | — |   | — |   | — |   | — |   | — |   | 0.00 | % |
| Caja Madrid,  Miami Agency             |       | US$           |       | 36,091,650                              |       | —                                                |       | — |   | 4,330,625 |   | — |   | — |   | 4,330,625 |   | 4.91 | % |
| Citibank N.A.,  Nassau, Bahamas Branch |       | US$           |       | 36,091,650                              |       | —                                                |       | — |   | 14,990,625 |   | — |   | — |   | 14,990,625 |   | 4.91 | % |
| Colpatria                              |       | $ Colom  |       | 1,610,953                               |       | —                                                |       | — |   | 747,885 |   | — |   | — |   | 747,885 |   | 12.17 | % |
| Conavi                                 |       | $ Colom  |       | 4,027,384                               |       | —                                                |       | — |   | 1,869,712 |   | — |   | — |   | 1,869,712 |   | 12.17 | % |
| Corfinsura                             |       | $ Colom  |       | 6,443,813                               |       | —                                                |       | — |   | 2,991,539 |   | — |   | — |   | 2,991,539 |   | 12.17 | % |
| Davivienda                             |       | $ Colom  |       | 4,833,085                               |       | —                                                |       | — |   | 2,243,654 |   | — |   | — |   | 2,243,654 |   | 12.17 | % |
| Export  Development Corporation Loan   |       | US$           |       | 7,362,007                               |       | 733,748                                               |       | 733,748 |   | 1,467,496 |   | 2,934,992 |   | — |   | 5,869,984 |   | 4.82 | % |
|                                   |       | US$           |       | 3,773,381                               |       | 744,193                                               |       | 744,193 |   | 744,193 |   | 372,096 |   | — |   | 2,604,675 |   | 4.50 | % |
| Granahorrar                            |       | $ Colom  |       | 2,416,432                               |       | —                                                |       | — |   | 1,121,846 |   | — |   | — |   | 1,121,846 |   | 12.17 | % |
| Kreditanstalt für  Wiederaufbau   |       | US$           |       | 1,105,629                               |       | 280,355                                               |       | 280,355 |   | 140,178 |   | — |   | — |   | 700,888 |   | 4.85 | % |
| JP Morgan Chase  Bank                  |       | US$           |       | 14,436,658                              |       | 12,812,500                                            |       | — |   | — |   | — |   | — |   | 12,812,500 |   | 8.60 | % |
| Banco de Crédito                  |       | Soles         |       | —                                  |       | 6,198,995                                             |       | — |   | — |   | — |   | — |   | 6,198,995 |   | 5.88 | % |
| Banco Continental                      |       | Soles         |       | —                                  |       | 8,813,028                                             |       | — |   | — |   | — |   | — |   | 8,813,028 |   | 5.25 | % |
| Skandinaviska  Enskilda Banken         |       | US$           |       | 2,862,837                               |       | 846,865                                               |       | — |   | — |   | — |   | — |   | 846,865 |   | 6.50 | % |
| Credit Suisse  First Boston            |       | US$           |       | —                                  |       | —                                                |       | 2,198,625 |   | 13,176,375 |   | — |   | — |   | 15,375,000 |   | 10.25 | % |
| Banco Provincia  de Buenos Aires       |       | US$           |       | —                                  |       | 512,500                                               |       | — |   | — |   | — |   | — |   | 512,500 |   | 4.37 | % |
| ING Bank N.V.,  Curacao Branch         |       | US$           |       | —                                  |       | —                                                |       | — |   | 6,662,500 |   | — |   | — |   | 6,662,500 |   | 4.91 | % |
| San Paolo                              |       | US$           |       | —                                  |       | —                                                |       | — |   | 5,552,083 |   | — |   | — |   | 5,552,083 |   | 4.91 | % |
| HSBC                                   |       | US$           |       | —                                  |       | —                                                |       | — |   | 2,776,042 |   | — |   | — |   | 2,776,042 |   | 4.91 | % |
| Total                                  |       |          |       | 260,879,515                             |       | 39,472,541                                            |       | 10,487,193 |   | 104,262,000 |   | 8,392,825 |   | — |   | 162,614,559 |   |   |   |

 

F-46

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**15.****     ****Debt due to banks and financial institutions, continued:**

 
| ** **                             | ** ** | **As of December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|
| ** **                             | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **%**                                 | ** ** | **%** | ** ** |
| ** **                             | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Percentage of debt in foreign currency |       | 98.92                                 | %          | 99.41 | % |
| Percentage of debt in local currency   |       | 1.08                                  | %          | 0.59 | % |
| Total                                  |       | 100.00                                | %          | 100.00 | % |

 

d.      Debt priority

 

Exceptfor certain debts, which are collateralized by liens on specific assets (seeNote 26), all of these debts rank the same in priority of payment.

 

F-47

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**16.****     ****Bonds and notes payable:**

 

a.      Details of the current portion of bondspayable is as follows at each year-end:

 
| ** **      | ** ** | ** **        | ** ** | ** **   | ** ** | **Face Value** | ** ** | **Interest** | ** ** | **Maturity** | ** ** | **Par Value** | ** ** |
|-----------------|------------|-------------------|------------|--------------|------------|---------------------|------------|--------------|------------|--------------|------------|--------------------|------------|
| **Issuer**      | ** ** | **Series**        | ** ** | **Currency** | ** ** | **Outstanding**     | ** ** | **Rate**     | ** ** | **Date**     | ** ** | **2004**           | ** ** | **2005** | ** ** |
| Endesa-Chile    |       | 1                 |       | US$          |       | 230,000,000         |       | 7.88         | %          | 02-01-2027   |       | 3,907,150          |       | 3,464,882 |   |
| Endesa-Chile    |       | 2                 |       | US$          |       | 220,000,000         |       | 7.33         | %          | 02-01-2037   |       | 3,877,448          |       | 3,441,225 |   |
| Endesa-Chile    |       | 3                 |       | US$          |       | 200,000,000         |       | 8.13         | %          | 02-01-2097   |       | 831,717            |       | 719,688 |   |
| Endesa-Chile    |       | 1                 |       | US$          |       | 400,000,000         |       | 7.75         | %          | 07-15-2008   |       | 8,204,834          |       | 7,281,770 |   |
| Endesa-Chile    |       | 1                 |       | US$          |       | 400,000,000         |       | 8.50         | %          | 04-01-2009   |       | 4,908,464          |       | 4,356,250 |   |
| Endesa-Chile    |       | E-1 and E-2       |       | U.F.         |       | 6,000,000           |       | 6.20         | %          | 08-01-2006   |       | 2,738,956          |       | 110,593,059 |   |
| Endesa-Chile    |       | C2, D1 and D2     |       | U.F.         |       | 1,115,287           |       | 6.80         | %          | 11-01-2010   |       | 2,901,114          |       | — |   |
| Endesa-Chile    |       | F                 |       | U.F.         |       | 1,500,000           |       | 6.20         | %          | 08-01-2022   |       | 684,740            |       | 686,050 |   |
| Endesa-Chile    |       | 144A              |       | US$          |       | 400,000,000         |       | 8.35         | %          | 08-01-2013   |       | 8,036,407          |       | 7,132,292 |   |
| Endesa-Chile    |       | 144A              |       | US$          |       | 200,000,000         |       | 8.63         | %          | 08-01-2015   |       | 4,150,540          |       | 3,683,594 |   |
| Endesa-Chile    |       | G                 |       | U.F.         |       | 4,000,000           |       | 4.80         | %          | 10-15-2010   |       | 709,207            |       | 710,565 |   |
| Endesa-Chile    |       | H                 |       | U.F.         |       | 4,000,000           |       | 6.20         | %          | 10-15-2008   |       | 912,984            |       | 914,731 |   |
| Betania         |       | B                 |       | $ Col.  |       | 300,000,000,000     |       | 12.04        | %          | 11-10-2011   |       | 1,240,398          |       | 1,092,650 |   |
| Edegel-Peru     |       | 1                 |       | US$          |       | 30,000,000          |       | 8.75         | %          | 06-03-2006   |       | 119,578            |       | 15,481,125 |   |
| Edegel-Peru     |       | 2                 |       | US$          |       | 30,000,000          |       | 8.41         | %          | 02-14-2007   |       | 555,162            |       | 492,705 |   |
| Edegel-Peru     |       | 3                 |       | US$          |       | 30,000,000          |       | 8.75         | %          | 06-13-2007   |       | 78,344             |       | 69,571 |   |
| Edegel-Peru     |       | 4                 |       | US$          |       | 20,000,000          |       | 8.44         | %          | 11-21-2005   |       | 11,658,075         |       | — |   |
| Edegel-Peru     |       | 1A                |       | Soles        |       | 100,000,000         |       | 6.00         | %          | 06-06-2005   |       | 17,659,954         |       | — |   |
| Edegel-Peru     |       | 3A                |       | Soles        |       | 50,000,000          |       | 4.13         | %          | 09-04-2006   |       | 116,897            |       | 7,567,939 |   |
| Edegel-Peru     |       | 3B                |       | Soles        |       | 50,000,000          |       | 4.88         | %          | 10-30-2006   |       | 71,458             |       | 7,529,350 |   |
| Edegel-Peru     |       | 4A                |       | Soles        |       | 50,000,000          |       | 4.75         | %          | 12-12-2006   |       | 20,888             |       | 7,486,406 |   |
| Edegel-Peru     |       | 5 A 2nd emission  |       | US$          |       | 10,000,000          |       | 3.75         | %          | 01-26-2009   |       | 92,635             |       | 82,214 |   |
| Edegel-Peru     |       | 6 A 2nd emission  |       | Soles        |       | 30,000,000          |       | 5.88         | %          | 02-27-2008   |       | 105,923            |       | 89,951 |   |
| Edegel-Peru     |       | 6 B 2nd emission  |       | Soles        |       | 20,000,000          |       | 8.50         | %          | 06-18-2008   |       | 10,798             |       | 9,170 |   |
| Edegel-Peru     |       | 7 A 2nd emission  |       | US$          |       | 10,000,000          |       | 4.78         | %          | 07-26-2009   |       | 91,678             |       | 124,211 |   |
| Edegel-Peru     |       | 8 A 2nd emission  |       | Soles        |       | 22,370,000          |       | 6.00         | %          | 03-10-2008   |       | —             |       | 61,261 |   |
| Edegel-Peru     |       | 8 B 2nd emission  |       | Soles        |       | 25,700,000          |       | 6.47         | %          | 03-30-2008   |       | —             |       | 62,082 |   |
| Edegel-Peru     |       | 9 A 2nd emission  |       | Soles        |       | 70,000,000          |       | 6.91         | %          | 06-1-2009    |       | —             |       | 60,177 |   |
| Edegel-Peru     |       | 10 A 2nd emission |       | Soles        |       | 35,000,000          |       | 6.72         | %          | 10-21-2010   |       | —             |       | 67,325 |   |
| Edegel-Peru     |       | 11 A 2nd emission |       | US$          |       | 20,000,000          |       | 3.71         | %          | 11-18-2012   |       | —             |       | 72,457 |   |
| Emgesa-Colombia |       | A-1               |       | $ Col.  |       | 15,000,000,000      |       | 8.68         | %          | 07-26-2006   |       | 65,870             |       | 53,591 |   |
| Emgesa-Colombia |       | B-5               |       | $ Col.  |       | 12,750,000,000      |       | 9.97         | %          | 10-09-2004   |       | —             |       | — |   |
| Emgesa-Colombia |       | B-7               |       | $ Col.  |       | 19,500,000,000      |       | 10.29        | %          | 10-09-2006   |       | 112,720            |       | 3,456,778 |   |
| Emgesa-Colombia |       | B-1               |       | $ Col.  |       | 229,825,000,000     |       | 10.60        | %          | 10-09-2009   |       | 1,369,673          |       | 1,112,862 |   |
| Emgesa-Colombia |       | B-1               |       | $ Col.  |       | 60,000,000,000      |       | 10.57        | %          | 11-10-2009   |       | 216,658            |       | 178,605 |   |
| Emgesa-Colombia |       | C-10              |       | $ Col.  |       | 7,701,962,000       |       | 9.88         | %          | 10-09-2009   |       | 88,315             |       | 84,138 |   |
| Emgesa-Colombia |       | C-10              |       | $ Col.  |       | 19,777,918,000      |       | 10.25        | %          | 10-08-2009   |       | 47,834             |       | 45,573 |   |
| Emgesa-Colombia |       | B-1 2nd emission  |       | $ Col.  |       | 50,000,000,000      |       | 15.18        | %          | 07-26-2006   |       | 1,045,727          |       | 12,445,994 |   |
| Emgesa-Colombia |       | B-1               |       | $ Col.  |       | 85,000,000,000      |       | 13.95        | %          | 07-26-2006   |       | 1,231,173          |       | 1,032,660 |   |
| Emgesa-Colombia |       | A-10              |       | $ Col.  |       | 210,000,000,000     |       | 10.18        | %          | 02-23-2015   |       | —             |       | 4,375,126 |   |
| Subtotal        |       |              |       |         |       |                |       |         |       |         |       | 77,863,319         |       | 206,118,027 |   |

 

F-48

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| Emgesa-Colombia             |       | A1         |       | $Col       |       | 15,000,000,000 |       | 8.68       | %          | 07-26-2006 |       | —     |       | 19,071,061  |   |
|-----------------------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|------------|------------|------------|------------|-------------|--------|
| Endesa  Chile Internacional |       | Only       |       | US$        |       | 150,000,000    |       | 7.20       | %          | 04-01-2006 |       | 1,559,159  |       | 78,258,750  |   |
| Total                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | 79,422,478 | ** ** | 303,447,838 |   |

 

F-49

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

b.      Details of the long-term portion of bondspayable is as follows at each year-end:

 
| ** **                 | ** ** | ** **        | ** ** | ** **   | ** ** | **FaceValue**   | ** ** | **Interest** | ** ** | **Maturity** | ** ** | **Par Value** | ** ** |
|----------------------------|------------|-------------------|------------|--------------|------------|-----------------|------------|--------------|------------|--------------|------------|--------------------|------------|
| **Issuer**                 | ** ** | **Series**        | ** ** | **Currency** | ** ** | **Outstanding** | ** ** | **Rate**     | ** ** | **Date**     | ** ** | **2004**           | ** ** | **2005** | ** ** |
| Endesa-Chile               |       | 1                 |       | US$          |       | 230,000,000     |       | 7.88         | %          | 02-01-2027   |       | 118,889,359        |       | 105,514,012 |   |
| Endesa-Chile               |       | 2                 |       | US$          |       | 220,000,000     |       | 7.33         | %          | 02-01-2037   |       | 127,042,608        |       | 112,750,000 |   |
| Endesa-Chile               |       | 3                 |       | US$          |       | 200,000,000     |       | 8.13         | %          | 02-01-2097   |       | 23,338,883         |       | 20,713,200 |   |
| Endesa-Chile               |       | 1                 |       | US$          |       | 400,000,000     |       | 7.75         | %          | 07-15-2008   |       | 230,986,560        |       | 205,000,000 |   |
| Endesa-Chile               |       | 1                 |       | US$          |       | 400,000,000     |       | 8.50         | %          | 04-01-2009   |       | 230,986,560        |       | 205,000,000 |   |
| Endesa-Chile               |       | E-1 and E-2       |       | U.F.         |       | 6,000,000       |       | 6.20         | %          | 08-01-2006   |       | 107,642,783        |       | — |   |
| Endesa-Chile               |       | C2; D1 and D2     |       | U.F.         |       | 1,115,287       |       | 6.80         | %          | 11-01-2010   |       | 16,035,205         |       | — |   |
| Endesa-Chile               |       | F                 |       | U.F.         |       | 1,500,000       |       | 6.20         | %          | 08-01-2022   |       | 26,910,696         |       | 26,962,215 |   |
| Endesa-Chile               |       | 144A              |       | US$          |       | 400,000,000     |       | 8.35         | %          | 08-01-2013   |       | 230,986,559        |       | 205,000,000 |   |
| Endesa-Chile               |       | 144A              |       | US$          |       | 200,000,000     |       | 8.63         | %          | 08-01-2015   |       | 115,493,280        |       | 102,500,000 |   |
| Endesa-Chile               |       | G                 |       | U.F.         |       | 4,000,000       |       | 4.80         | %          | 10-15-2010   |       | 71,761,855         |       | 71,899,240 |   |
| Endesa-Chile               |       | H                 |       | U.F.         |       | 4,000,000       |       | 6.20         | %          | 10-15-2008   |       | 71,761,855         |       | 71,899,240 |   |
| Betania                    |       | B                 |       | $ Col.  |       | 300,000,000,000 |       | 12.04        | %          | 11-10-2011   |       | 72,492,822         |       | 67,309,700 |   |
| Edegel-Peru                |       | 1                 |       | US$          |       | 30,000,000      |       | 8.75         | %          | 06-03-2006   |       | 17,323,992         |       | — |   |
| Edegel-Peru                |       | 2                 |       | US$          |       | 30,000,000      |       | 8.41         | %          | 2-14-2007    |       | 17,323,992         |       | 15,375,000 |   |
| Edegel-Peru                |       | 3                 |       | US$          |       | 30,000,000      |       | 8.75         | %          | 6-13-2007    |       | 17,323,992         |       | 15,375,000 |   |
| Edegel-Peru                |       | 3A                |       | Soles        |       | 50,000,000      |       | 4.13         | %          | 09-04-2006   |       | 8,794,798          |       | — |   |
| Edegel-Peru                |       | 3 B               |       | Soles        |       | 50,000,000      |       | 4.88         | %          | 10-30-2006   |       | 8,794,798          |       | — |   |
| Edegel-Peru                |       | 4A                |       | Soles        |       | 50,000,000      |       | 4.75         | %          | 12-12-2006   |       | 8,794,798          |       | — |   |
| Edegel-Peru                |       | 5A 2nd emission   |       | US$          |       | 10,000,000      |       | 3.75         | %          | 1-26-2009    |       | 5,774,664          |       | 5,125,000 |   |
| Edegel-Peru                |       | 6 A 2nd emission  |       | Soles        |       | 30,000,000      |       | 5.88         | %          | 2-27-2008    |       | 5,276,877          |       | 4,481,201 |   |
| Edegel-Peru                |       | 6 B 2nd emission  |       | Soles        |       | 20,000,000      |       | 8.50         | %          | 6-18-2008    |       | 3,517,919          |       | 2,987,467 |   |
| Edegel-Peru                |       | 7 A 2nd emission  |       | US$          |       | 10,000,000      |       | 4.78         | %          | 7-26-2009    |       | 5,774,664          |       | 5,125,000 |   |
| Edegel-Peru                |       | 8 A 2nd emission  |       | Soles        |       | 22,370,000      |       | 6.00         | %          | 03-10-2008   |       | —             |       | 3,341,482 |   |
| Edegel-Peru                |       | 8 B 2nd emission  |       | Soles        |       | 25,700,000      |       | 6.47         | %          | 03-30-2008   |       | —             |       | 3,838,895 |   |
| Edegel-Peru                |       | 9A 2nd emission   |       | Soles        |       | 70,000,000      |       | 6.91         | %          | 06-01-2009   |       | —             |       | 10,456,135 |   |
| Edegel-Peru                |       | 10A 2nd emission  |       | Soles        |       | 35,000,000      |       | 6.72         | %          | 10-21-2010   |       | —             |       | 5,228,068 |   |
| Edegel-Peru                |       | 11A 2nd emission  |       | US$          |       | 20,000,000      |       | 3.71         | %          | 11-18-2012   |       | —             |       | 10,250,000 |   |
| Emgesa-Colombia            |       | A-1               |       | $ Col.  |       | 15,000,000,000  |       | 9.89         | %          | 7-26-2006    |       | 3,624,645          |       | — |   |
| Emgesa-Colombia            |       | B-1               |       | $ Col.  |       | 85,000,000,000  |       | 13.95        | %          | 6-26-2006    |       | 20,539,572         |       | — |   |
| Emgesa-Colombia            |       | B-7               |       | $ Col.  |       | 19,500,000,000  |       | 10.29        | %          | 10-09-2006   |       | 4,712,039          |       | — |   |
| Emgesa-Colombia            |       | B-10              |       | $ Col.  |       | 229,825,000,000 |       | 10.60        | %          | 10-09-2009   |       | 55,535,585         |       | 51,564,785 |   |
| Emgesa-Colombia            |       | B-10              |       | $ Col.  |       | 60,000,000,000  |       | 10.57        | %          | 11-10-2009   |       | 14,498,581         |       | 13,461,776 |   |
| Emgesa-Colombia            |       | C-10              |       | $ Col.  |       | 7,701,962,000   |       | 9.88         | %          | 10-09-2009   |       | 3,699,403          |       | 3,610,294 |   |
| Emgesa-Colombia            |       | C-10              |       | $ Col.  |       | 19,777,918,000  |       | 10.25        | %          | 10-08-2009   |       | 2,078,712          |       | 2,028,642 |   |
| Emgesa-Colombia            |       | B-10 2nd emission |       | $ Col.  |       | 50,000,000,000  |       | 15.18        | %          | 7-26-2006    |       | 12,082,099         |       | — |   |
| Emgesa-Colombia            |       | A-10              |       | $ Col.  |       | 210,000,000,000 |       | 10.18        | %          | 02-23-2015   |       | —             |       | 47,116,741 |   |
| Endesa Chile International |       | Only              |       | US$          |       | 150,000,000     |       | 7.20         | %          | 04-01-2006   |       | 86,619,960         |       | — |   |
| Total                      |       |              |       |         |       |            |       |         |       |         |       | 1,746,420,115      |       | 1,393,913,093 |   |

 

F-50

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

c.       Bonds payable by entities:

 

*Endesa-Chile (individual legal entity):*

 

•                  The Company made following public offerings of bonds in the local marketon the following dates:

 

On December 7, 1990 the third bond issuance wasregistered under No.131 for 4,000,000 UF. From this issuance, on December 31,2003, have been placed UF 2,030,000. The remaining balance UF 1,970,000 hasbeen eliminated due to that the placement date is overdue. This issuance was fullypaid on May 2, 2005.

 

On August 9, 2001 the fourth bond issuance wassubscribed under No. 264 for UF 7,500,000, which was fully paid as of December 31,2001.

 

On November 26, 2002, the fifth bond issuance wasregistered under No. 317 and No. 318 for UF 8,000,000 and was fully placed asof December 2003.

 

Risk ratings of the last two bonds issuances are asfollows:

 
| **Rating Entity**                                       | ** ** | **Category** |
|---------------------------------------------------------|------------|--------------|
| Feller—Comisión Clasificadora de Riesgo Ltda. |       | A+           |
| Comisión Clasificadora de Riesgo                   |       | A+           |
| Fitch Chile Clasificadora de Riesgo Ltda.               |       | A+           |

 
| **Third Issuance**    | ** ** | **Issuance Terms**                                                                                                                                                                                                            |
|-----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Empresa Nacional de Electricidad S.A                                                                                                                                                                                          |
| Securities issued     |       | Bearer bonds in local currency, denominated in  Unidades de Fomento                                                                                                                                                           |
| Issuance Value        |       | Four million Unidades de Fomento (UF 4,000,000)  divided into:                                                                                                                                                                |
|                  |       | —Series C-1: 120 bonds at UF 10,000 each                                                                                                                                                                                 |
|                  |       | —Series C-2: 800 bonds at UF 1,000 each                                                                                                                                                                                  |
|                  |       | —Series D-1: 120 bonds at UF 10,000 each                                                                                                                                                                                 |
|                  |       | —Series D-2: 800 bonds at UF 1,000 each                                                                                                                                                                                  |
| Indexation            |       | Based on variations in Unidad de Fomento index                                                                                                                                                                                |
| Amortization period   |       | Series C-1 and C-2: 15 years (5-year grace period  and 10 years to amortize capital)                                                                                                                                          |
|                  |       | Series D-1 and D-2: 20 years (5-year grace period  and 15 years to amortize capital)                                                                                                                                          |
| Capital amortization  |       | Series C-1 and C-2: 20 consecutive installments  payable semi-annually, starting April 1, 1996. Amortization installments will  increase with time.                                                                           |
|                  |       | Series D-1 and D-2: 30 consecutive installments  payable semi-annually, starting May 1, 1996. Amortization installments will  increase with time.                                                                             |
| Early Redemption      |       | At the issuers option, starting May 1, 1996 and only  on the interest payment and amortization dates.                                                                                                                         |
| Nominal interest rate |       | 6.8% annually, compounded and on semi-annually  outstanding capital, readjusted by the value of the Unidad de Fomento. The  applicable interest rate will be equal to 3.34409%.                                               |
| Interest Payments     |       | Interest will be paid semi-annually each May 1 and  November 1, starting May 1, 1991. Accrued interest at the end of the year  amounts to ThCh$ 0 (ThCh$ 208,755 in 2004), and is shown under current  liabilities. |

 

F-51

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| Guarantee        |   | There is no specific guarantee; however there is a  general guarantee over the issuer’s assets.                            |
|------------------|--------|---------------------------------------------------------------------------------------------------------------------------------|
| Placement period |   | 48 months from the registration date in the Chilean  Securities Register of the SVS. This issuance was paid-in-full in May 2005 |

 
| **Fourth Issuance**   | ** ** | **Issuance Terms**                                                                                                                                                                                                                                |
|-----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Empresa Nacional de Electricidad S.A                                                                                                                                                                                                              |
| Securities issued     |       | Bearer bonds in local currency, denominated in  Unidades de Fomento                                                                                                                                                                               |
| Issuance Value        |       | Seven and a half million (UF 7,500,000) divided  into:                                                                                                                                                                                       |
|                  |       | Series E-1: 600 bonds at UF 10,000 each.                                                                                                                                                                                                          |
|                  |       | Series E-2: 600 bonds at UF 10,000 each.                                                                                                                                                                                                          |
|                  |       | Series F: 150 bonds at UF 10,000 each.                                                                                                                                                                                                            |
| Indexation            |       | Based on variations in Unidad de Fomento index                                                                                                                                                                                                    |
| Amortization period   |       | Series E-1 and E-2: August 1, 2006.                                                                                                                                                                                                               |
|                  |       | Series F: August 1, 2022.                                                                                                                                                                                                                         |
| Early Redemption      |       | Only in the case of Series F, beginning February 1,  2012.                                                                                                                                                                                        |
| Nominal interest rate |       | 6.2% annually, compounded on outstanding capital,  readjusted by the value of the Unidad de Fomento. The interest rate applied  semi-annually will be equal to 3.0534%.                                                                           |
| Placement period      |       | 36 months from the registration date in the Chilean  Securities Register of the SVS.                                                                                                                                                              |
| Guarantee             |       | There is no specific guarantee; however, there is a  general guarantee over the issuer’s assets.                                                                                                                                             |
| Interest payments     |       | Interest will be paid semi-annually each August 1  and February 1, starting August 1, 2001. Accrued interest at the end of the  year amounted to ThCh$ 3,430,249 (ThCh$ 3,423,695 in 2004) and is presented  under current liabilities. |

 
| **Fifth Issuance**    | ** ** | **Issuance Terms**                                                                                                                                                                                                    |
|-----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Empresa Nacional de Electricidad S.A                                                                                                                                                                                  |
| Securities issued     |       | Bearer bonds in local currency, denominated in  Unidades de Fomento                                                                                                                                                   |
| Issuance Value        |       | Eight million (UF 8,000,000) divided into:                                                                                                                                                                       |
|                  |       | Series G: 4,000 bonds at UF 1,000 each.                                                                                                                                                                               |
|                  |       | Series H: 4,000 bonds at UF 1,000 each.                                                                                                                                                                               |
| Indexation            |       | Based on variations in Unidad de Fomento index                                                                                                                                                                        |
| Amortization period   |       | Series G: October 15, 2010.Series H: in semi-annual installments from April 15,  2010.                                                                                                                                |
| Early Redemption      |       | Only in the case of Series G, beginning October 16,  2004.                                                                                                                                                            |
| Nominal interest rate |       | Series G: 4.8% annually, in semi-annual  installments, compounded on outstanding capital, readjusted by the value of  the Unidad de Fomento. The interest rate applied semi-annually will be equal  to 2.3719%.  |
|                  |       | Series H: 6.2% annually, in semi-annual installments,  compounded on outstanding capital, readjusted by the value of the Unidad de  Fomento. The interest rate applied semi-annually will be equal to 3.0534%.        |

 

F-52

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| Placement period  |   | 36 months from the registration date in the Chilean  Securities Register of the SVS.                                                                                                                                                              |
|-------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Guarantee         |   | There is no specific guarantee; however, there is a  general guarantee over the issuer’s assets.                                                                                                                                             |
| Interest payments |   | Interest will be paid semi-annually each April 15  and October 15, starting April 15, 2004. Accrued interest at the end of the  year amounted to ThCh$ 1,625,296 (ThCh$ 1,622,192 in 2004) and is presented  under current liabilities. |

 

•                  The Company has issued and placed four public offerings of bonds in theinternational market as follows:

 

Risk ratings of the bonds are as follows as of thedate of these financial statements:

 
| **Rating Entity**               | ** ** | **Category** |
|---------------------------------|------------|--------------|
| Standard & Poor’s      |       | BBB–    |
| Moody’s Investors Services |       | Ba1          |
| Fitch                           |       | BBB–    |

 
| **First Issuance**    | ** ** | **Issuance Terms**                                                                                                                                                                                                                                            |
|-----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Empresa Nacional de Electricidad S.A                                                                                                                                                                                                                          |
| Securities issued     |       | Marketable securities denominated in US$ (Yankee  bonds) in the US market.                                                                                                                                                                               |
| Issuance Value        |       | Six hundred and fifty million US Dollars  (US$650,000,000) divided into:                                                                                                                                                                                      |
|                  |       | Series 1: US$230,000,000                                                                                                                                                                                                                                      |
|                  |       | Series 2: US$220,000,000                                                                                                                                                                                                                                 |
|                  |       | Series 3: US$200,000,000                                                                                                                                                                                                                                      |
| Indexation            |       | Variation of the US Dollar                                                                                                                                                                                                                                    |
| Capital Amortization  |       | Series 1 full expiration on February 1, 2027                                                                                                                                                                                                                  |
|                  |       | Series 2 full expiration on February 1, 2037 (Put  Option on February 1, 2009, on which date the holders may redeem 100% of the  securities plus accrued interest).                                                                                      |
|                  |       | Series 3 full expiration on February 1, 2097                                                                                                                                                                                                                  |
|                  |       |                                                                                                                                                                                                                                                          |
| Nominal interest rate |       | Series 1: 7.875% annually                                                                                                                                                                                                                                     |
|                  |       | Series 2: 7.325%annually                                                                                                                                                                                                                                      |
|                  |       | Series 3: 8.125% annually                                                                                                                                                                                                                                     |
|                  |       |                                                                                                                                                                                                                                                          |
| Interest Payments     |       | Interest will be paid semi-annually each February 1  and August 1 annually, starting January 27, 1997. Accrued interest as of  December 31, 2005 amounts to ThCh$ 10,779,051 (ThCh$ 12,145,443 in 2004),  which is shown under current liabilities. |

 
| **Second Issuance**   | ** ** | **Issuance Terms**                                                              |
|-----------------------|------------|---------------------------------------------------------------------------------|
| Issuer                |       | Empresa Nacional de Electricidad S.A                                            |
| Securities issued     |       | Marketable securities denominated in US$ (Yankee  bonds) in the US market. |
| Issuance Value        | ** ** | Four hundred million US Dollars (US$ 400,000,000)                          |
| Indexation            | ** ** | Variation in the US Dollar                                                      |
| Capital amortization  | ** ** | Series 1 full expiration on July 15, 2008                                       |
| Nominal interest rate |       | Series 1:   7.75% annually                                                 |

 

F-53

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| Interest Payments | ** ** | Interest will be paid semi-annually each January 15  and July 15 annually, starting January 15, 1999. Accrued interest as of  December 31, 2005 amounts to ThCh$ 7,281,770 (ThCh$ 8,204,834 in 2004), which  is shown under current liabilities. |
|-------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| **Third Issuance**    | ** ** | **Issuance Terms**                                                                                                                                                                                                                                       |
|-----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Empresa Nacional de Electricidad S.A                                                                                                                                                                                                                     |
| Securities issued     |       | Marketable securities denominated in US$ (Yankee  bonds) in the US market.                                                                                                                                                                          |
| Issuance Value        |       | Four hundred million US Dollars (US$ 400,000,000)                                                                                                                                                                                                   |
| Indexation            |       | Variation in the US Dollar                                                                                                                                                                                                                               |
| Capital amortization  |       | Series 1 full expiration on April 1, 2009                                                                                                                                                                                                                |
| Nominal interest rate |       | Series 1: 8.50% annually                                                                                                                                                                                                                                 |
| Interest Payments     |       | Interest will be paid semi-annually each October 1  and April 1 annually, starting October, 1 1999. Accrued interest as of  December 31, 2005 amounts to ThCh$ 4,356,250 (ThCh$ 4,908,464 in 2004), which  is shown under current liabilities. |

 
| **Fourth Issuance**   | ** ** | **Issuance Terms**                                                                                                                                                                                                                                         |
|-----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Empresa Nacional de Electricidad S.A                                                                                                                                                                                                                       |
| Securities issued     |       | Marketable electronic securities denominated in US$ (Yankee  bonds) in the US and European market under the Rule 144-A.                                                                                                                               |
| Issuance Value        |       | Six hundred million US Dollars (US$ 600,000,000)  divided in two series.                                                                                                                                                                              |
| Indexation            |       | Variation in the US Dollar                                                                                                                                                                                                                                 |
| Capital amortization  |       | Series 1: expiration on August 1, 2013: US Dollars  400,000,000;                                                                                                                                                                                           |
|                  |       | Series 2: expiration on August 1, 2015: US Dollars  200,000,000                                                                                                                                                                                            |
| Nominal interest rate |       | Series 1: 8.35% annually                                                                                                                                                                                                                                   |
|                  |       | Series 2: 8.625% annually                                                                                                                                                                                                                                  |
| Interest Payments     |       | Interest will be paid semi-annually each February 1  and August 1 annually, starting July 23, 2003. Accrued interest as of  December 31, 2005 amounts to ThCh$ 10,815,886 (ThCh$ 12,186,947 in 2004),  which is shown under current liabilities. |

 

Repurchase of Yankee Bonds:

 

During November 2001, the Company made a tender offerto repurchase all of a portion of the First Issuance of the following series ofYankee Bonds:

 

—Series1:  US$ 230,000,000; 30 years term withmaturity in 2027.

—Series3:  US$ 200,000,000; 100 years term withmaturity in 2097.

 

The offer expired November 21, 2001, and the Companyrepurchased a total of US$ 24,119,000 and US$ 159,584,000 of Series 1 and 3bonds, respectively, with accrued interest, at prices of US$ 21,324,000 and US$134,828,000 for Series 1 and 3, respectively.

 

F-54

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

*Endesa-Chile Internacional*

 

Endesa-Chile Internacional issued Yankee Bonds onApril 1, 1996. The risk rating of these bonds is as follows as of the date ofthese financial statements:

 
| **Rating Entity**               | ** ** | **Category** |
|---------------------------------|------------|--------------|
| Standard & Poor’s      |       |         | BBB– |
| Moody’s Investors Services |       |         | Ba1 |

 
| **First Issuance**    | ** ** | **Issuance Terms**                                                                                                                                                                                                   |
|-----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Endesa-Chile Internacional                                                                                                                                                                                           |
| Securities issued     |       | Marketable securities denominated in US$ (150,000  bonds).                                                                                                                                                      |
| Issuance Value        |       | One hundred and fifty million Dollars (US$ 150,000,000)                                                                                                                                                         |
| Readjustment          |       | Variation in the US Dollar                                                                                                                                                                                           |
| Capital amortization  |       | Full expiration as of April 1, 2006                                                                                                                                                                                  |
| Nominal interest rate |       | 7.2% annually until expiration                                                                                                                                                                                       |
| Interest Payments     |       | Interest is to be paid quarterly, beginning on  October 1, 1996. Accrued interest as of December 31, 2004 amounts to ThCh$ 1,383,750  (ThCh$ 1,559,159 in 2004), which is shown under current liabilities. |
| Guarantee             |       | Guarantee from Empresa Nacional de Electricidad S.A.                                                                                                                                                                 |

 

*EdegelS.A.*

 

Edegel S.A. has performed eighteen issuances of bondson June 4, 1999, February 15, 2000, June 14, 2000 and November 27, 2000, August22, 2001, June 6, 2003, September 4, 2003, October 29, 2003, December 12, 2003,January 26, 2004, February 27, 2004, June 18, 2004, July 26, 2004, March 10,2005, March 30, 2005, June 1, 2005, October 21, 2005, November 18, 2005. Theoutstanding bonds are detalled as follows:

 
| **Issuance Terms**    | ** ** | ** **                                                                                                                                                                               |
|-----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Edegel S.A.                                                                                                                                                                              |
| Securities issued     |       | Marketable securities denominated in US$ (110,000  bonds).                                                                                                                          |
| Issuance Value        |       | One hundred and ten million US dollars (US$ 110,000,000)                                                                                                                            |
| Capital amortization  |       | Full expiration as of June 3, 2006, February 14,  2007, June 13, 2007, and November 21, 2005, respectively.                                                                              |
| Nominal interest rate |       | 8.75%, 8.41%, 8.75%, and 8.44% annually.                                                                                                                                                 |
| Interest Payments     |       | Interest will be paid semi-annually. Accrued  interest as of December 31, 2005 amounts to ThCh$ 668,401 (ThCh$ 861,832 in  2004) and is shown under other current liabilities. |

 
| **Issuance Terms**    | ** ** | ** **                                                           |
|-----------------------|------------|----------------------------------------------------------------------|
| Issuer                |       | Edegel S.A.                                                          |
| Securities issued     |       | Marketable securities denominated in Peruvian Soles  (20,000 bonds). |
| Issuance Value        |       | One hundred million Peruvian Soles (Peruvian Soles  100,000,000)     |
| Capital amortization  |       | Full expiration as of June 6, 2005.                                  |
| Nominal interest rate |       | 6.0% annually.                                                       |

 

F-55

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| Interest Payments |   | Interest will be paid semi-annually. Accrued  interest as of December 31, 2005 amounts to ThCh$ 0 (ThCh$ 70,359 in 2004)  and is shown under other current liabilities. The issuance was paid-in-full  on June, 2005. |
|-------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| **Issuance Terms**    | ** ** | ** **                                                                                                                                                                              |
|-----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Edegel S.A.                                                                                                                                                                             |
| Securities issued     |       | Marketable securities denominated in Peruvian Soles  (10,000 bonds).                                                                                                                    |
| Issuance Value        |       | Fifty million Peruvian Soles (Peruvian Soles  50,000,000)                                                                                                                               |
| Capital amortization  |       | Full expiration as of September 4, 2006                                                                                                                                                 |
| Nominal interest rate |       | 4.13% annually.                                                                                                                                                                         |
| Interest Payments     |       | Interest will be paid semi-annually. Accrued  interest as of December 31, 2005 amounts to ThCh$ 99,271 (ThCh$ 116,897 in  2004) and is shown under other current liabilities. |

 
| **Issuance Terms**    | ** ** | ** **                                                                                                                                                                             |
|-----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Edegel S.A.                                                                                                                                                                            |
| Securities issued     |       | Marketable securities denominated in Peruvian Soles  (10,000 bonds).                                                                                                                   |
| Issuance Value        |       | Fifty million Peruvian Soles (Peruvian Soles  50,000,000)                                                                                                                              |
| Capital amortization  |       | Full expiration as of October 30, 2006.                                                                                                                                                |
| Nominal interest rate |       | 4.875% annually.                                                                                                                                                                       |
| Interest Payments     |       | Interest will be paid semi-annually. Accrued  interest as of December 31, 2005 amounts to ThCh$ 60,682 (ThCh$ 71,458 in  2004) and is shown under other current liabilities. |

 
| **Issuance Terms**    | ** ** | ** **                                                                                                                                                                             |
|-----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Edegel S.A.                                                                                                                                                                            |
| Securities issued     |       | Marketable securities denominated in Peruvian Soles  (10,000 bonds).                                                                                                                   |
| Issuance Value        |       | Fifty million Peruvian Soles (Peruvian Soles  50,000,000)                                                                                                                              |
| Capital amortization  |       | Full expiration as of December 12, 2006.                                                                                                                                               |
| Nominal interest rate |       | 4.75% annually.                                                                                                                                                                        |
| Interest Payments     |       | Interest will be paid semi-annually. Accrued  interest as of December 31, 2005 amounts to ThCh$ 17,738 (ThCh$ 20,888 in  2004) and is shown under other current liabilities. |

 
| **Issuance Terms**    | ** ** | ** **                                                                                                                                                                             |
|-----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Edegel S.A.                                                                                                                                                                            |
| Securities issued     |       | Marketable securities denominated in US Dollar  (10,000 bonds).                                                                                                                        |
| Issuance Value        |       | Ten million US Dollar (US$ 10,000,000)                                                                                                                                            |
| Capital amortization  |       | Full expiration as of January 26, 2009.                                                                                                                                                |
| Nominal interest rate |       | 3.75% annually.                                                                                                                                                                        |
| Interest Payments     |       | Interest will be paid semi-annually. Accrued  interest as of December 31, 2005 amounts to ThCh$ 82,214 (ThCh$ 92,635 in  2004) and is shown under other current liabilities. |

 

F-56

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| **Issuance Terms**    | ** ** | ** **                                                                                                                                                                              |
|-----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Edegel S.A.                                                                                                                                                                             |
| Securities issued     |       | Marketable securities denominated in Peruvian Soles  (6,000 bonds).                                                                                                                     |
| Issuance Value        |       | Thirty million Peruvian Soles (Peruvian Soles  30,000,000)                                                                                                                              |
| Capital amortization  |       | Full expiration as of February 27, 2008.                                                                                                                                                |
| Nominal interest rate |       | 5.875% annually.                                                                                                                                                                        |
| Interest Payments     |       | Interest will be paid semi-annually. Accrued  interest as of December 31, 2005 amounts to ThCh$ 89,951 (ThCh$ 105,923 in  2004) and is shown under other current liabilities. |

 
| **Issuance Terms**    | ** ** | ** **                                                                                                                                                                            |
|-----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Edegel S.A.                                                                                                                                                                           |
| Securities issued     |       | Marketable securities denominated in Peruvian Soles  (4,000 bonds).                                                                                                                   |
| Issuance Value        |       | Twenty million Peruvian Soles (Peruvian Soles  20,000,000)                                                                                                                            |
| Capital amortization  |       | Full expiration as of June 18, 2008.                                                                                                                                                  |
| Nominal interest rate |       | 5.88% annually.                                                                                                                                                                       |
| Interest Payments     |       | Interest will be paid semi-annually. Accrued  interest as of December 31, 2005 amounts to ThCh$ 9,170 (ThCh$ 10,798 in  2004) and is shown under other current liabilities. |

 
| **Issuance Terms**    | ** ** | ** **                                                                                                                                                                              |
|-----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Edegel S.A.                                                                                                                                                                             |
| Securities issued     |       | Marketable securities denominated in US Dollar  (10,000 bonds).                                                                                                                         |
| Issuance Value        |       | Ten million US Dollar (US$ 10,000,000)                                                                                                                                             |
| Capital amortization  |       | Full expiration as of July 26, 2009.                                                                                                                                                    |
| Nominal interest rate |       | Libor 6 M + 1.78125%                                                                                                                                                                    |
| Interest Payments     |       | Interest will be paid semi-annually. Accrued  interest as of December 31, 2005 amounts to ThCh$ 124,211 (ThCh$ 91,678 in  2004) and is shown under other current liabilities. |

 
| **Issuance Terms**    | ** ** | ** **                                                                                                                                                 |
|-----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Edegel S.A.                                                                                                                                                |
| Securities issued     |       | Marketable securities denominated Peruvian Soles  (4,474 bonds).                                                                                           |
| Issuance Value        |       | Twenty two million, three hundred seventy thousand  Peruvian Soles                                                                                         |
|                  |       | (Peruvian Soles 22,370,000)                                                                                                                                |
| Capital amortization  |       | Full expiration as of March 10, 2008.                                                                                                                      |
| Nominal interest rate |       | 6.00% annually.                                                                                                                                            |
| Interest Payments     |       | Interest will be paid semi-annually. Accrued interest  as of December 31, 2005 amounts to ThCh$ 61,261 and is shown under other  current liabilities. |

 
| **Issuance Terms**    | ** ** | ** **                                                                                                                                                 |
|-----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Edegel S.A.                                                                                                                                                |
| Securities issued     |       | Marketable securities denominated Peruvian Soles  (5,140 bonds).                                                                                           |
| Issuance Value        |       | Twenty five million, seven hundred thousand Peruvian  Soles (Peruvian Soles 25,700,000)                                                                    |
| Capital amortization  |       | Full expiration as of March 30, 2008.                                                                                                                      |
| Nominal interest rate |       | 6.47% annually.                                                                                                                                            |
| Interest Payments     |       | Interest will be paid semi-annually. Accrued  interest as of December 31, 2005 amounts to ThCh$ 62,082 and is shown under  other current liabilities. |

 

F-57

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| **Issuance Terms**    | ** ** | ** **                                                                                                                                                 |
|-----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Edegel S.A.                                                                                                                                                |
| Securities issued     |       | Marketable securities denominated Peruvian Soles  (14,000 bonds).                                                                                          |
| Issuance Value        |       | Seventy million Peruvian Soles (Peruvian Soles  70,000,000)                                                                                                |
| Capital amortization  |       | Full expiration as of June 01, 2009.                                                                                                                       |
| Nominal interest rate |       | 6.91% annually.                                                                                                                                            |
| Interest Payments     |       | Interest will be paid semi-annually. Accrued  interest as of December 31, 2005 amounts to ThCh$ 60,177 and is shown under  other current liabilities. |

 
| **Issuance Terms**    | ** ** | ** **                                                                                                                                                 |
|-----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Edegel S.A.                                                                                                                                                |
| Securities issued     |       | Marketable securities denominated Peruvian Soles (7,000  bonds).                                                                                           |
| Issuance Value        |       | Thirty five million Peruvian Soles (Peruvian Soles  35,000,000)                                                                                            |
| Capital amortization  |       | Full expiration as of October 21, 2010.                                                                                                                    |
| Nominal interest rate |       | 6.72% annually.                                                                                                                                            |
| Interest Payments     |       | Interest will be paid semi-annually. Accrued  interest as of December 31, 2005 amounts to ThCh$ 67,325 and is shown under  other current liabilities. |

 
| **Issuance Terms**    | ** ** | ** **                                                                                                                                                 |
|-----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Edegel S.A.                                                                                                                                                |
| Securities issued     |       | Marketable securities denominated US Dollars (20,000  bonds).                                                                                              |
| Issuance Value        |       | Twenty million US Dollars (US$ 20,000,000)                                                                                                            |
| Capital amortization  |       | Full expiration as of November 18, 2012.                                                                                                                   |
| Nominal interest rate |       | 3.71% annually.                                                                                                                                            |
| Interest Payments     |       | Interest will be paid semi-annually. Accrued  interest as of December 31, 2005 amounts to ThCh$ 72,457 and is shown under  other current liabilities. |

 

*EmgesaS.A.*

 

Emgesa S.A. issued bonds on October 8, 1999, July 9,2001, and February 23, 2005, from the first issuance, and on February 26, 2003,as per the following:

 
| **First Issuance**    | ** ** | **Issuance Terms**                                                                                                                                                                             |
|-----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Emgesa S.A.                                                                                                                                                                                    |
| Securities issued     |       | Marketable securities denominated in Colombian pesos                                                                                                                                           |
| Issuance Value        |       | Five hundred and thirty billion Colombian pesos  ($Col 530,000,000,000)                                                                                                                        |
| Capital amortization  |       | Full expiration between 2004 and 2009 at the amount  of $Col 449,554,880                                                                                                                       |
| Nominal interest rate |       | 15.5% annual average rate                                                                                                                                                                      |
| Interest Payments     |       | Interest will be paid quarterly and annually.  Accrued interest as of December 31, 2005 amounts to ThCh$ 1,566,066 (ThCh$ 3,132,243 in 2004) and is shown under current liabilities. |

 

F-58

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| **Second Issuance**   | ** ** | **Issuance Terms**                                                                                                                                                                |
|-----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Emgesa S.A.                                                                                                                                                                       |
| Securities issued     |       | Marketable securities denominated in Colombian pesos                                                                                                                              |
| Issuance Value        |       | One hundred and fifty billion Colombian pesos ($Col  150,000,000,000)                                                                                                             |
| Capital amortization  |       | Full expiration on July 26, 2006                                                                                                                                                  |
| Nominal interest rate |       | 15.18% average annual rate                                                                                                                                                        |
| Interest Payments     |       | Interest will be paid annually. Accrued interest as  of December 31, 2005 amounts to ThCh$ 1,227,721 (ThCh$ 1,045,727 in 2004) and  is shown under current liabilities. |

 
| **Third Issuance**    | ** ** | **Issuance Terms**                                                                                                                                 |
|-----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Emgesa S.A.                                                                                                                                        |
| Securities issued     |       | Marketable securities denominated in Colombian pesos                                                                                               |
| Issuance Value        |       | Two hundred and ten billion of Colombian pesos ($Col  210,000,000,000)                                                                             |
| Capital amortization  |       | Full expiration on February 23, 2015                                                                                                               |
| Nominal interest rate |       | IPC + 5.04% quarterly                                                                                                                              |
| Interest Payments     |       | Interest will be paid annually. Accrued interest as  of December 31, 2005 amounts to ThCh$ 4,375,126 and is shown under current  liabilities. |

 

*Central Hidroeléctrica de Betania S.A.*

 

Central Hidroeléctrica de Betania S.A. E.S.P. issuedbonds on November 11, 2004 from the first issuance, as per the following:

 
| **First Issuance**    | ** ** | **Issuance Terms**                                                                                                                                                                               |
|-----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Issuer                |       | Central Hidroeléctrica de Betania S.A. E.S.P.                                                                                                                                               |
| Securities issued     |       | Ordinary bonds denominated in Colombian pesos                                                                                                                                                    |
| Issuance Value        |       | Four hundred billion Colombian pesos ($Col  400,000,000,000)                                                                                                                                     |
| Capital amortization  |       | Expiration between 2009 and 2011 at the amount of  $Col 400,000,000,000                                                                                                                          |
| Nominal interest rate |       | IPC+6.29%   (11.40%) effective annual rate                                                                                                                                                  |
| Interest Payments     |       | Interest will be paid quarterly and annually.  Accrued interest as of December 31, 2005 amounts to ThCh$ 11,151,767 (ThCh$ 12,786,252 in 2004) and is shown under current liabilities. |

 

The discount of the bonds was deferred in the year ofthe respective issuance. As of December 31, 2005, such discounts amount toThCh$ 11,151,767 (ThCh$ 12,786,252 in 2004) and are shown under other assets.

 

F-59

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

d.              Notes payable

 

Compositionof the short-term and long-term balance per creditor as of each year end is asfollows:

 
| ** **                 | ** ** | **Short-term**                        | ** ** | **Long-term**                         | ** ** |
|----------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | **As of December 31,** | ** ** | **As of December 31,** | ** ** |
| ** **                 | ** ** | **2004**                              | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                 | ** ** | **ThCh$**                             | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                       |       |                                  |       |                                  |       |   |   |   |   |
| Mitsubishi Corporation (1) |       | 25,631,739                            |       | 27,704,713                            |       | 97,066,000 |   | 52,690,125 |   |
| Total                      |       | 25,631,739                            |       | 27,704,713                            |       | 97,066,000 |   | 52,690,125 |   |

 

----

(1)          Balanceincludes financing arrangements provided by the supplier of electricalinstallations and equipment for San Isidro and Endesa Costanera plants.

 

F-60

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**17.****                  ****Accrued liabilities:**

 

Theaccrued expenses included in short-term and long-term liabilities as of eachyear end are as follows:

 
| ** **                                                     | ** ** | **Short-term**                        | ** ** | **Long-term**                         | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **As of December 31,** | ** ** | **As of December 31,** | ** ** |
| ** **                                                     | ** ** | **2004**                              | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                     | ** ** | **ThCh$  **                 | ** ** | **ThCh$**                             | ** ** | **ThCh$ ** | ** ** | **ThCh$** | ** ** |
|                                                           |       |                                  |       |                                  |       |   |   |   |   |
| Employee salaries                                              |       | 7,452,125                             |       | 9,141,149                             |       | — |   | — |   |
| Provision for contingences,  lawsuits, and others              |       | 2,252,557                             |       | 8,691,873                             |       | — |   | — |   |
| Provision for expenses, costs  and investments                 |       | 2,274,106                             |       | 3,238,359                             |       | — |   | — |   |
| Provisional tax payments and  other                            |       | —                                |       | —                                |       | 7,718,994 |   | — |   |
| Post retirement benefits                                       |       | 176,014                               |       | —                                |       | 4,268,998 |   | 4,144,356 |   |
| Employee severance indemnities  (1)                            |       | 158,742                               |       | 121,137                               |       | 4,396,438 |   | 5,192,561 |   |
| Pensions and post-retirement benefits  of foreign subsidiaries |       | —                                |       | —                                |       | 21,946,033 |   | 18,843,984 |   |
| Accrued purchases of energy and  power                         |       | 2,576,724                             |       | 805,532                               |       | — |   | — |   |
| Others                                                         |       | 883,217                               |       | 848,333                               |       | 688,933 |   | 387,026 |   |
| Total                                                          |       | 15,773,485                            |       | 22,846,383                            |       | 39,019,396 |   | 28,567,927 |   |

 

----

(1)  Long-termaccruals include severance indemnities to personnel, calculated in accordancewith the policy described in Note 2 (p), and an analysis of the changes in theaccrual in each year is as follows:

 

| ** **                          | ** ** | **As of December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| ** **                          | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** |
|                                |       |                                  |       |   |   |
| Opening balance as of January 1     |       | 3,587,660                             |       | 4,396,438 |   |
| Net increase in accrual             |       | 907,876                               |       | 1,035,993 |   |
| Net transfers to short-term accrual |       | (99,098                               | )          | (239,870 | ) |
| Total                               |       | 4,396,438                             |       | 5,192,561 |   |

 

F-61

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**18.****                  ****Minority interest:**

 

Theinformation presented below represents the participation by non-controllingshareholders in the legal entities presented below. As a result the economicparticipation by minority interest shareholders may be larger at theconsolidated level of Endesa-Chile.

 

a.   Minorityshareholders’ participation in the shareholders’ equity of the Company’ssubsidiaries as of each year-end is as follows:

 
| ** **                                        | ** ** | **As of December 31, 2004** | ** ** | **As of December 31, 2005** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| **Company**                                       | ** ** | **Equity**                                      | ** ** | **Participation**                               | ** ** | **Total** | ** ** | **Equity** | ** ** | **Participation** | ** ** | **Total** | ** ** |
| ** **                                        | ** ** | **ThCh$**                                       | ** ** | **%**                                           | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **%** | ** ** | **ThCh$** | ** ** |
| Capital de Energía S.A.                      |       | 449,097,351                                     |       | 49.00                                           | %          | 220,057,700 |   | 353,519,936 |   | 49.00 | % | 173,224,769 |   |
| Central Hidroeléctrica Betania S.A.          |       | 410,982,836                                     |       | 14.38                                           | %          | 59,090,291 |   | 367,176,012 |   | 14.38 | % | 52,791,833 |   |
| Central Cachoeira Dourada                         |       | 373,915,847                                     |       | 0.39                                            | %          | 1,473,677 |   | — |   | 0.00 | % | — |   |
| Endesa Costanera S.A.                             |       | 170,495,799                                     |       | 35.74                                           | %          | 60,926,517 |   | 140,493,163 |   | 35.74 | % | 50,205,102 |   |
| Compañía Eléctrica San Isidro S.A. |       | 54,361,382                                      |       | 50.00                                           | %          | 27,180,691 |   | — |   | 0.00 | % | — |   |
| Edegel S.A.                                       |       | 503,839,216                                     |       | 36.44                                           | %          | 183,618,157 |   | 431,307,963 |   | 36.44 | % | 157,185,011 |   |
| Emgesa S.A.                                       |       | 764,799,967                                     |       | 51.52                                           | %          | 394,001,235 |   | 583,039,985 |   | 51.52 | % | 300,364,126 |   |
| Empresa Eléctrica Pangue S.A.                |       | 81,276,427                                      |       | 5.02                                            | %          | 4,076,988 |   | 95,681,574 |   | 5.02 | % | 4,799,579 |   |
| Endesa Argentina S.A.                             |       | 55,441,812                                      |       | 0.01                                            | %          | 5,545 |   | 40,631,767 |   | 0.01 | % | 4,063 |   |
| Generandes Perú S.A.                         |       | 286,154,158                                     |       | 40.37                                           | %          | 115,517,629 |   | 251,167,277 |   | 40.37 | % | 101,393,768 |   |
| Hidroeléctrica El Chocón S.A.           |       | 186,224,829                                     |       | 34.81                                           | %          | 64,824,863 |   | 167,858,100 |   | 34.81 | % | 58,431,405 |   |
| Hidroinvest S.A.                                  |       | 75,260,613                                      |       | 30.07                                           | %          | 22,630,866 |   | 67,227,735 |   | 30.07 | % | 20,215,380 |   |
| Ingendesa S.A.                                    |       | 2,447,814                                       |       | 2.36                                            | %          | 57,830 |   | — |   | 0.00 | % | — |   |
| Pehuenche S.A.                                    |       | 197,547,780                                     |       | 7.35                                            | %          | 14,519,762 |   | 208,026,098 |   | 7.35 | % | 15,289,918 |   |
| Túnel El Melón S.A.                     |       | (8,725,392                                      | )          | 0.05                                            | %          | (4,363 | ) | (10,511,587 | ) | 0.05 | % | (5,256 | ) |
| Total                                             |       |                                            |       |                                            |       | 1,167,977,388 |   |   |   |   |   | 933,899,698 |   |

 

F-62

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

 

b.      Minorityshareholders’ equity participation in the results from operations of theCompany’s subsidiaries for each year is as follows:

 
| ** **                                           | ** ** | **Year-ended December 31, 2003** | ** ** | **Year-ended December 31, 2004** | ** ** | **Year-ended December 31, 2005** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                           | ** ** | **Net**                                         | ** ** | **Partici-**                                    | ** ** | ** **                                      | ** ** | **Net** | ** ** | **Partici-** | ** ** | ** ** | ** ** | **Net** | ** ** | **Partici-** | ** ** | ** ** | ** ** |
| **Company**                                          | ** ** | **Income**                                      | ** ** | **pation**                                      | ** ** | **Total**                                       | ** ** | **Income** | ** ** | **pation** | ** ** | **Total** | ** ** | **Income** | ** ** | **pation** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **ThCh$ **                                 | ** ** | **ThCh$ **                                 | ** ** | **ThCh$ **                                 | ** ** | **ThCh$ ** | ** ** | **ThCh$ ** | ** ** | **ThCh$ ** | ** ** | **ThCh$ ** | ** ** | ** ** | ** ** | **ThCh$** | ** ** |
| Capital de  Energía S.A.                        |       | 9,147,082                                       |       | 49.10                                           | %          | 4,491,217                                       |       | 13,854,574 |   | 49.00 | % | 6,788,741 |   | 19,376,598 |   | 49.00 | % | 9,494,533 |   |
| Central  Hidroeléctrica Betania S.A.            |       | (1,792,648                                      | )          | 14.38                                           | %          | (257,783                                        | )          | (4,806,254 | ) | 14.38 | % | (691,034 | ) | 2,429,249 |   | 14.38 | % | 349,273 |   |
| Central Cachoeira  Dourada  S.A.(1)                  |       | 4,630,123                                       |       | 0.39                                            | %          | 18,057                                          |       | 15,351,944 |   | 0.39 | % | 60,506 |   | 22,978,923 |   | 0.39 | % | 90,564 |   |
| Endesa Costanera  S.A.                               |       | 36,408,777                                      |       | 35.74                                           | %          | 13,012,498                                      |       | 5,673,607 |   | 35.74 | % | 2,027,458 |   | (10,821,438 | ) | 35.74 | % | (3,867,031 | ) |
| Compañía  Eléctrica San Isidro S.A(2) |       | 13,993,566                                      |       | 50.00                                           | %          | 6,996,783                                       |       | 14,724,770 |   | 50.00 | % | 7,362,385 |   | — |   | 0.00 | % | — |   |
| Inversiones  Eléctricas Quillota S.A.(3)        |       | —                                          |       | —                                          |       | —                                          |       | — |   | 0.00 | % | — |   | (10,057,558 | ) | 50.00 | % | (5,028,779 | ) |
| Edegel S.A.                                          |       | 33,858,888                                      |       | 36.44                                           | %          | 12,338,179                                      |       | 18,433,284 |   | 36.44 | % | 6,717,789 |   | 34,522,426 |   | 36.44 | % | 12,581,284 |   |
| Emgesa S.A.                                          |       | 23,595,256                                      |       | 51.52                                           | %          | 12,156,276                                      |       | 29,170,139 |   | 51.52 | % | 15,027,552 |   | 40,388,072 |   | 51.52 | % | 20,806,683 |   |
| Empresa Eléctrica  Pangue S.A.                  |       | 39,514,901                                      |       | 5.01                                            | %          | 1,979,697                                       |       | 5,014,196 |   | 5.02 | % | 251,522 |   | 19,376,338 |   | 5.02 | % | 971,956 |   |
| Endesa Argentina  S.A.                               |       | 40,706,328                                      |       | 0.01                                            | %          | 4,071                                           |       | (469,091 | ) | 0.01 | % | (47 | ) | (9,516,794 | ) | 0.01 | % | (952 | ) |
| Generandes Perú  S.A.                           |       | 30,323,345                                      |       | 40.37                                           | %          | 12,241,534                                      |       | 19,866,076 |   | 40.37 | % | 8,019,740 |   | 29,192,886 |   | 40.37 | % | 11,784,882 |   |
| Hidroeléctrica El  Chocón S.A.             |       | 14,452,979                                      |       | 34.81                                           | %          | 5,031,082                                       |       | (3,617,827 | ) | 34.81 | % | (1,259,366 | ) | 2,584,025 |   | 34.81 | % | 899,499 |   |
| Hidroinvest S.A.                                     |       | 7,544,808                                       |       | 30.07                                           | %          | 2,268,725                                       |       | (7,005,761 | ) | 30.07 | % | (2,106,632 | ) | (119,673 | ) | 30.07 | % | (35,986 | ) |
| Ingendesa S.A.                                       |       | 1,702,507                                       |       | 2.36                                            | %          | 40,179                                          |       | 981,872 |   | 2.36 | % | 23,197 |   | — |   | 0.00 | % | — |   |
| Pehuenche S.A.                                       |       | 48,633,097                                      |       | 7.35                                            | %          | 3,574,533                                       |       | 28,873,983 |   | 7.35 | % | 2,122,238 |   | 60,184,201 |   | 7.35 | % | 4,423,539 |   |
| Túnel El Melón  S.A.                       |       | (2,406,587                                      | )          | 0.05                                            | %          | (1,203                                          | )          | (1,781,105 | ) | 0.05 | % | (891 | ) | (1,786,195 | ) | 0.05 | % | (893 | ) |
| Total                                                |       |                                            |       |                                            |       | 73,893,845                                      |       |   |   |   |   | 44,343,158 |   |   |   |   |   | 52,468,572 |   |

 

----

(1)          See Note 10 (c)(iii.).

(2)          See Note 10 (d)(i.).

(3)          See Note 10 (f)(iii.).

 

F-63

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**19.****                  ****Shareholders’ equity:**

 

a.     Dividends

 

Inaccordance with Law 18.046, the Company must declare a minimum dividend. Thisminimum dividend amounts to 30% of consolidated net income before consolidatedamortization of negative goodwill. The Company paid dividends to shareholdersduring 2004 and 2005 related to 2003 and 2004 net income, respectively, asfollows:

 

| **Payment date** | ** ** | **Historical value  Ch$ per share** | ** ** | **Type of dividend** | ** ** | **Related Year** | ** ** |
|-----------------------|------------|----------------------------------------------------|------------|--------------------------------|------------|-----------------------|------------|
|                  |       |                                               |       |                           |       |                  |       |
| April 2004            |       | 2.30000                                            |       | Final                          |       | 2003                  |       |
| April 2005            |       | 4.13000                                            |       | Final                          |       | 2004                  |       |

 

Nodividend was paid in 2003 related to 2002 net income because the Companyincurred a net loss for the year ended December 31, 2002.

 

b.      Number of shares

 

Asof each of the years ended December 31, 2003, 2004 and 2005, the number ofshares authorized, subscribed, outstanding and paid for was 8,201,754,580, allof which having voting rights**.**

 

c.       Subscribed and paid-in capital

 

Subscribed and paid-in capital as of each of the years ended December 31,2003, 2004 and 2005 amounted to ThCh$ 1,115,200,845.

 

F-64

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

d.      Other reserves

 

Otherreserves are composed of the following as of December 31, of each year:

 
| ** **                                                                                                  | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                                                                                                  | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** |
|                                                                                                        |       |                                  |       |   |   |
| Accumulated capital revaluation                                                                             |       | 1,771,077                             |       | 1,771,077 |   |
| Revaluation of property, plant and  equipment under Decree Law No. 4                                        |       | 1,214,256                             |       | 1,214,256 |   |
| Other revaluations                                                                                          |       | 79,016                                |       | 79,016 |   |
| Reserve for technical revaluation of  property, plant and equipment (Circulars 550 and 566)                 |       | 30,375,611                            |       | 30,375,611 |   |
| Reserve for technical revaluation of  investments in subsidiaries subsequently sold (Circulars 550 and 566) |       | 25,543,605                            |       | 25,543,605 |   |
| Equity adjustment of unconsolidated  subsidiaries                                                           |       | (346,109                              | )          | (346,109 | ) |
| Reserve (Technical Bulletin No. 72)                                                                         |       | —                                |       | (33,694,515 | ) |
| Reduction of capital in foreign  subsidiaries                                                               |       | (6,447,148                            | )          | (6,447,148 | ) |
| Accumulated translation adjustment of  domestic entities reporting in foreign currency                      |       | (8,552,730                            | )          | (18,308,193 | ) |
| Accumulated foreign currency translation  adjustment related to foreign subsidiaries, net (1)               |       | (19,563,984                           | )          | (34,696,049 | ) |
| Total                                                                                                       |       | 24,073,594                            |       | (34,508,449 | ) |

 

----

(1)  The detailof the net cumulative translation adjustment for foreign currency gains andlosses on liabilities and net investments measured in currencies other than theChilean peso as of December 31, of each year are as follows:

 

| ** **                                        | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                        | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                              |       |                                  |       |   |   |   |   |
| Endesa Argentina S.A.                             |       | 4,519,258                             |       | 7,118 |   | (5,179,740 | ) |
| Endesa Chile Internacional                        |       | 1,746,303                             |       | 1,746,303 |   | 1,746,303 |   |
| Distrilec Inversora S.A                           |       | 168,471                               |       | 30,911 |   | (127,437 | ) |
| Cesa S.A.                                         |       | —                                |       | (14,757 | ) | (37,705 | ) |
| C.H. Betania S.A. (Endesa Colombia S.A. in  2003) |       | 120,154                               |       | 120,154 |   | 120,154 |   |
| Ingendesa Do Brasil Ltda.                         |       | (17,279                               | )          | (123,426 | ) | (245,467 | ) |
| Cono Sur S.A.                                     |       | (6,978,055                            | )          | (20,798,580 | ) | (29,569,692 | ) |
| Endesa Costanera S.A.                             |       | (141,621                              | )          | (531,707 | ) | (1,402,465 | ) |
| Total                                             |       | (582,769                              | )          | (19,563,984 | ) | (34,696,049 | ) |

 

F-65

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**20.     Other income and expenses:**

 

a.               The detail of other non-operating incomein each year is as follows:

 
| ** **                                           | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **ThCh$**                                  | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                                 |       |                                       |       |   |   |   |   |
| Effect of application of BT 64                       |       | 19,580,010                                 |       | 6,059,182 |   | 10,760,401 |   |
| Gain on sale of property, plant and  equipment       |       | 1,763,021                                  |       | 7,065,663 |   | 4,073,304 |   |
| Gain on sale of other assets                         |       | 5,291                                      |       | 26,563 |   | — |   |
| Energy and power contract settlement                 |       | 2,564,471                                  |       | 12,481,492 |   | 7,537,107 |   |
| Dividends Empresa Eléctrica de Bogotá      |       | 2,454,416                                  |       | 1,477,635 |   | 913,500 |   |
| Indemnities and commissions                          |       | 2,425,966                                  |       | 10,050 |   | 1,838,037 |   |
| Gains on service and other contracts                 |       | 1,014,206                                  |       | 269,174 |   | 771,870 |   |
| Gain on sale of derivative instruments               |       | —                                     |       | 7,164,419 |   | — |   |
| Recovery of expenses and clients’ portfolio     |       | 12,374,331                                 |       | 1,217,262 |   | 2,296,415 |   |
| Gain from sales of investments                       |       | 1,548,263                                  |       | — |   | — |   |
| Guarantee for bonds of Infraestructura Dos  Mil S.A. |       | 727,863                                    |       | — |   | — |   |
| Reversal of contingency provision                    |       | —                                     |       | 13,633,802 |   | 1,061,719 |   |
| Other                                                |       | 2,874,554                                  |       | 3,681,307 |   | 4,027,786 |   |
| Total                                                |       | 47,332,392                                 |       | 53,086,549 |   | 33,280,139 |   |

 

b.              Other non-operating expenses in each yearare as follows:

 
| ** **                                                 | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                 | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                 | ** ** | **ThCh$**                                  | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                                       |       |                                       |       |   |   |   |   |
| Effect of application of BT 64                             |       | 15,340,980                                 |       | 32,817,414 |   | 13,266,061 |   |
| Adjustment of Investments in Related  Companies            |       | —                                     |       | 1,515,088 |   | 4,141,458 |   |
| Loss on sale of property, plant and  equipment             |       | 8,151,016                                  |       | 533,832 |   | 390,963 |   |
| Loss on sale of other assets                               |       | 429,506                                    |       | — |   | — |   |
| Loss on the sale of financial instruments                  |       | 1,213,422                                  |       | — |   | — |   |
| Costs of sales of materials and property,  plant and equip |       | 443,183                                    |       | 218,883 |   | 223,408 |   |
| Retirement benefits and severance  indemnities             |       | 1,949,491                                  |       | — |   | 849,856 |   |
| Board of directors compensation                            |       | 256,918                                    |       | 227,250 |   | 228,669 |   |
| Contingencies and litigation                               |       | 6,870,266                                  |       | 7,708,504 |   | 15,996,830 |   |
| Energy and power settlement (1)                            |       | 2,842,448                                  |       | 26,621,155 |   | 8,507,909 |   |
| Provision for obsolescence of  work-in-progress            |       | 2,115,142                                  |       | — |   | — |   |
| Provision for obsolescence of property,  plant and equip   |       | 9,374,952                                  |       | 111,921 |   | — |   |
| Tax penalties                                              |       | 6,388,519                                  |       | 3,305,205 |   | 1,849,916 |   |
| Tax on equity, Colombia                                    |       | —                                     |       | 2,646,509 |   | 3,385,056 |   |
| Other                                                      |       | 8,404,126                                  |       | 6,434,470 |   | 4,746,231 |   |
| Total                                                      |       | 63,779,969                                 |       | 82,140,231 |   | 53,586,357 |   |

 

----

(1)          Theamount recorded in 2003, corresponds to provisory recalculations ofenergy and power for operations from previous years. The amount recorded in 2004 corresponds to the result of recalculatingthe balances of power from the period April 2000-March 2004. In 2005, theamount recorded corresponds to the period of April 2004-December 2004.

 

F-66

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**21.****                              ****Price-level restatement:**

 

The gain(loss) from price-level restatement as of each year is as follows:

 
| ** **                                                        | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                        | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **ThCh$**                                  | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| **Assets**                                                        |       |                                       |       |   |   |   |   |
|                                                              |       |                                       |       |   |   |   |   |
| Current assets                                                    |       | 6,270,675                                  |       | 3,432,294 |   | 9,559,899 |   |
| Accounts receivable from  subsidiaries                            |       | 1,871,623                                  |       | 3,149,183 |   | 3,784,398 |   |
| Property, plant and equipment                                     |       | 20,742,187                                 |       | 45,037,279 |   | 65,971,613 |   |
| Investment in subsidiaries                                        |       | 1,873,833                                  |       | 4,286,550 |   | 6,013,844 |   |
| Goodwill and negative goodwill                                    |       | (1,004,582                                 | )          | (1,449,676 | ) | (1,444,946 | ) |
| Other assets                                                      |       | 25,246,978                                 |       | 53,244,293 |   | 55,300,097 |   |
| Net gain from asset accounts                                      |       | 55,000,714                                 |       | 107,699,923 |   | 139,184,905 |   |
|                                                              |       |                                       |       |   |   |   |   |
| **Liabilities and Shareholders’ equity**                     |       |                                       |       |   |   |   |   |
|                                                              |       |                                       |       |   |   |   |   |
| Shareholders’ equity                                         |       | (15,191,919                                | )          | (38,073,833 | ) | (55,193,144 | ) |
| Current and long-term  liabilities                                |       | (36,569,083                                | )          | (59,803,041 | ) | (72,111,730 | ) |
| Minority interest                                                 |       | (2,297,465                                 | )          | (4,140,183 | ) | (5,147,730 | ) |
| Accounts payable to  subsidiaries                                 |       | (328,799                                   | )          | (226,341 | ) | — |   |
| Net loss from liabilities and  shareholders’ equity accounts |       | (54,387,266                                | )          | (102,243,398 | ) | (132,452,604 | ) |
| Net gain from price-level  restatement of balance sheet           |       | 613,448                                    |       | 5,456,525 |   | 6,732,301 |   |
| Net loss from price-level  restatement of income statement        |       | (2,930                                     | )          | (3,165,575 | ) | (5,414,345 | ) |
| Net gain from price-level  restatement                            |       | 610,518                                    |       | 2,290,950 |   | 1,317,956 |   |

 

F-67

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**22. Foreign currency translation:**

 

The (charge)credit to income for foreign currency translation as of each year is asfollows:

** **

**Assets**

 
| ** **                             | ** ** | ** **   | ** ** | **As of December 31,** | ** ** |
|----------------------------------------|------------|--------------|------------|---------------------------------------|------------|
| ** **                             | ** ** | **Currency** | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                             | ** ** | ** **   | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| **Current assets**                |       |         |       |                                  |       |   |   |   |   |
|                                   |       |         |       |                                  |       |   |   |   |   |
| Cash                                   |       | US$          |       | 3,317,033                             |       | (104,633 | ) | 1,343,732 |   |
|                                   |       | Other        |       | 7,662                                 |       | 733 |   | — |   |
| Time deposits                          |       | US$          |       | (9,821,140                            | )          | (2,244,213 | ) | 2,137,402 |   |
|                                   |       | Other        |       | (7,350                                | )          | 3,768 |   | (229,915 | ) |
|                                   |       |         |       |                                  |       |   |   |   |   |
| Other accounts receivable, net         |       | US$          |       | (154,277                              | )          | (6,497 | ) | (22,069 | ) |
|                                   |       | UC           |       | (125,966                              | )          | (61,437 | ) | — |   |
|                                   |       | Other        |       | —                                |       | (394,288 | ) | (21,936 | ) |
|                                   |       |         |       |                                  |       |   |   |   |   |
| Other current assets                   |       | US$          |       | (23,584,085                           | )          | (546,475 | ) | (2,575,485 | ) |
|                                   |       | Other        |       | (147,353                              | )          | (139,255 | ) | (28,607 | ) |
| Accounts due from related companies    |       | US$          |       | —                                |       | (13,466,180 | ) | (506,001 | ) |
| Prepaid expenses                       |       | US$          |       | (66,519                               | )          | 6,831 |   | — |   |
|                                   |       |         |       |                                  |       |   |   |   |   |
| **Non-current assets**                 | ** ** | ** **   | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                   | ** ** | ** **   | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-term receivables                  |       | US$          |       | —                                |       | 880,304 |   | — |   |
|                                   |       | UC           |       | (236,215                              | )          | 7,332 |   | — |   |
| Accounts due from related  companies   |       | US$          |       | (30,786,235                           | )          | — |   | (12,202,404 | ) |
| Forward contracts                      |       | US$          |       | —                                |       | 1,167,359 |   | — |   |
| Other non-current assets               |       | US$          |       | (189,843,643                          | )          | (49,800,328 | ) | (37,302,529 | ) |
| Subtotal foreign currency  translation |       |         |       | (251,448,088                          | )          | (64,696,979 | ) | (49,407,812 | ) |

 

**Liabilities**

 
| ** **                                               |   | ** **   | ** ** | **As of December 31,** |       |
|----------------------------------------------------------|--------|--------------|------------|---------------------------------------|------------|
| ** **                                               |   | **Currency** | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2005** |   |
| ** **                                               |   | ** **   | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** | **ThCh$** |   |
| **Current liabilities**                                  |   |         |       |                                  |       |   |   |   |   |
| ** **                                               |   |         |       |                                  |       |   |   |   |   |
| Short-term debt due to banks  and financial institutions |   | US$          |       | 6,926,306                             |       | (460,598 | ) | — |   |
| Current portion of long-term                             |   | US$          |       | 7,686,412                             |       | 2,302,241 |   | (3,179,054 | ) |
| debt due to banks and financial  institutions            |   | ¥       |       | 59,542                                |       | 15,183 |   | (50,228 | ) |
|                                                     |   | Euro         |       | 92,597                                |       | 1,249 |   | 1,238 |   |
|                                                     |   | Pounds       |       | —                                |       | (104,558 | ) | (30,286 | ) |
|                                                     |   | UP           |       | 177,582                               |       | — |   | — |   |
| Current portion of bonds  payable                        |   | US$          |       | 14,154,938                            |       | 221,132 |   | 9,744,960 |   |
| Current portion of long-term                             |   | US$          |       | 2,387,645                             |       | 536,699 |   | (488,164 | ) |
|                                                     |   |         |       |                                  |       |   |   |   |   |
| Accounts payable to related companies                    |   | US$          |       | —                                |       | — |   | 1,197,065 |   |
| Dividends payable                                        |   | Other        |       | 48                                    |       | 51 |   | — |   |
| Accrued liabilities                                      |   | US$          |       | —                                |       | 188,722 |   | 15,881 |   |
|                                                     |   | Other        |       | —                                |       | 1,811 |   | (2,029,780 | ) |
| Accounts payable                                         |   | US$          |       | 55,423                                |       | (75,448 | ) | — |   |
|                                                     |   | Other        |       | 178                                   |       | 751 |   | — |   |
| Miscellaneous payables                                   |   | US$          |       | (149,604                              | )          | (1 | ) | — |   |
| Other current liabilities                                |   | US$          |       | 1,553,016                             |       | 54,310 |   | 1,247,079 |   |
|                                                     |   | Other        |       | (1,035                                | )          |   |   | — |   |
|                                                     |   |         |       |                                  |       |   |   |   |   |
| **Long-term liabilities**                                |   |         |       |                                  |       |   |   |   |   |
| Debt due to banks and financial  Institutions            |   | US$          |       | 95,822,099                            |       | 20,843,518 |   | 23,723,493 |   |
|                                                     |   | ¥       |       | 41,706                                |       | 3,883 |   | 64,416 |   |
|                                                     |   | Euro         |       | 1,070                                 |       | 466 |   | 5,279 |   |
|                                                     |   | UP           |       | 14,912                                |       | 937,706 |   | 41,233 |   |
| Bonds payable                                            |   | US$          |       | 135,441,478                           |       | 61,349,088 |   | 35,695,375 |   |
| Long-term notes payables                                 |   | US$          |       | 6,342,379                             |       | 1,610,096 |   | — |   |
| Accounts payable                                         |   | US$          |       | (183,763                              | )          | 1,739,969 |   | 3,377,666 |   |
| Other long-term liabilities                              |   | US$          |       | 10,374,413                            |       | (3,096,291 | ) | (1,078,019 | ) |
| Accounts payable to related Companies                    |   | US$          |       | 2,073,015                             |       | — |   | — |   |
| Forwards                                                 |   | US$          |       | (21,911,929                           | )          | — |   | (3,949,387 | ) |
| Subtotal foreign currency  translation                   |   |         |       | 260,958,430                           |       | 86,069,979 |   | 64,308,767 |   |
| Net income                                               |   |         |       | 9,510,338                             |       | 21,372,999 |   | 14,900,955 |   |

 

F-68

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**23.****                   Bond issuancecosts:**

 

The costs related to the registration and issuance of bonds ofEndesa-Chile incurred during the years ended December 31, 2003, 2004 and 2005are as follows:

 

| ** **      | ** ** | **As of December 31,** | ** ** |
|-----------------|------------|---------------------------------------|------------|
| ** **      | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **      | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| ** **      | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stamp taxes     |       | 2,311,548                             |       | — |   | — |   |
| Commissions     |       | 2,756,556                             |       | — |   | — |   |
| Consulting fees |       | 906,149                               |       | 394,829 |   | — |   |
| Insurance       |       | —                                |       | — |   | — |   |
| Other           |       | 58,818                                |       | 97,081 |   | — |   |
| Total           |       | 6,033,071                             |       | 491,910 |   | — |   |

 

Bond issuance costs are capitalized and included in Other assets andare amortized over the life of the bonds, on a straight-line basis, which doesnot differ significantly from the effective interest method.

 

**24.****           Other cash-flow items:**

 

The detail of other disbursements for financingpurposes as of December 31, 2004 and 2005 are as follows:

 

| ** **                               | ** ** | **As of December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                     |       |                                  |       |   |   |   |   |
| Realization of forward contracts         |       | 27,690,294                            |       | (4,322,666 | ) | (3,791,094 | ) |
| Fees related to issuance of bonds        |       | 18,295,179                            |       | — |   | — |   |
| Loans                                    |       | 7,323,344                             |       | — |   | — |   |
| Santander Leasing                        |       | —                                |       | (2,080,749 | ) | — |   |
| Cost of debt “Jumbo 1 & 2” |       | —                                |       | (2,008,339 | ) | — |   |
| Other                                    |       | 5,696,427                             |       | (32,531 | ) | — |   |
| Total cash-outflow                       |       | 59,005,244                            |       | (8,444,285 | ) | (3,791,094 | ) |

 

Cash flows related to other receipts from investmentsas of December 31, 2005 are as follows:

 
| ** **                                                                                       | ** ** | **As of December, 31** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                       | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                                       | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| ** **                                                                                       | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Payment to OHL for the sale of  Infraestructura 2000 S.A.                                        |       | —                                |       | 39,940,137 |   | — |   |
| Receipt of Loans granted to  former subsidiaries of Infraestructura 2000 S.A.                    |       | —                                |       | 1,823,895 |   | 2,063,456 |   |
| Receipt of Loans given to Infraestructura  group                                                 |       | 50,864,311                            |       |   |   |   |   |
| Return of capital investment  from related company (Empresa de Energía de Bogotá S.A.) |       | 2,005,925                             |       | — |   | 4,395,531 |   |
| Others                                                                                           |       | —                                |       | 271,005 |   | — |   |
| Total Cash flows related to other receipts  from investments                                     |       | 52,870,236                            |       | 42,035,037 |   | 6,458,987 |   |

 

F-69

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**25.****           Financialderivatives:**

 

As of December 31, 2005 the Company and its subsidiaries heldthe following financial derivative contracts with financial institutions withthe objective of decreasing exposure to interest rates and foreign currencyrisk:

 
| ** **  | ** ** | ** **  | ** ** | ** **     | ** ** | ** **    | ** ** | ** **        | ** ** | ** ** | ** ** | **As of December 31, 2005** | ** ** |
|-------------|------------|-------------|------------|----------------|------------|---------------|------------|-------------------|------------|------------|------------|-----------------------------|------------|
| ** **  | ** ** | **Nominal** | ** ** | **Period**     | ** ** | ** **    | ** ** | ** **        | ** ** | ** ** | ** ** | **Hedged**                  | ** ** | **Fair** | ** ** |
| **Type(1)** | ** ** | **amount**  | ** ** | **Of**         | ** ** | ** **    | ** ** | **Sales  (S)/**   | ** ** | **Hedged** | ** ** | **Amount**                  | ** ** | **Value** | ** ** |
| ** **  | ** ** | **US$**     | ** ** | **Maturity**   | ** ** | **Item**      | ** ** | **Purchase  (P)** | ** ** | **Item**   | ** ** | **ThCh$**                   | ** ** | **ThCh$** | ** ** |
| S           |       | 50,000,000  |       | 3rd Quarter 06 |       | Exchange rate |       | P                 |       | Bonds      |       | —                      |       | (1,071,746 | ) |
| EO          |       | 60,000,000  |       | 3rd Quarter 06 |       | Interest rate |       | P/S               |       | Bank-debt  |       | 30,750,000                  |       | (17,878 | ) |
| EO          |       | 40,000,000  |       | 3rd Quarter 06 |       | Interest rate |       | P/S               |       | Bank-debt  |       | 20,500,000                  |       | (116,988 | ) |

 

----

(1) EO = European Option or S =Swap

 

F-70

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**26.****           ****Commitments and contingencies:**

 

The detail of liens and guaranties granted by theCompany and its subsidiaries as of December 31, 2005 is as follows:

 

a.       Liens held by third parties:

 
| ** **    | ** ** | ** **        | ** ** | **As of December 31, 2005**                                                              | ** ** |
|---------------|------------|-------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|
| ** **    | ** ** | ** **        | ** ** | **Book value of encumbered assets and schedule to be released** | ** ** |
| **Guarantee** | ** ** | **Subsidiary**    | ** ** | **2006**                                                                                                     | ** ** | **2007-2009** | ** ** | **After 2009** | ** ** | **Total** | ** ** |
| ** **    | ** ** | ** **        | ** ** | **ThCh$**                                                                                                    | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|          |       |              |       |                                                                                                         |       |   |   |   |   |   |   |
| Mitsubishi    |       | Endesa  Costanera |       | 9,932,758                                                                                                    |       | 6,891,979 |   | — |   | 16,824,737 |   |
| Total         |       |              |       | 9,932,758                                                                                                    |       | 6,891,979 |   | — |   | 16,824,737 |   |

 

b.      Guarantees of subsidiary obligations:

 
| ** **                          | ** ** | ** **                                           | ** ** | **As of December 31, 2005** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                          | ** ** | ** **                                           | ** ** | **Balance payable of  related debt**            | ** ** |
| **Guarantee**                       | ** ** | **Subsidiary**                                       | ** ** | **2006**                                        | ** ** | **2007-2009** | ** ** | **After 2009** | ** ** | **Total** | ** ** |
| ** **                          | ** ** | ** **                                           | ** ** | **ThCh$**                                       | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                |       |                                                 |       |                                            |       |   |   |   |   |   |   |
| J.P.  Morgan Chase Bank             |       | Endesa  Chile Internacional                          |       | 76,875,000                                      |       | — |   | — |   | 76,875,000 |   |
| Banco  Español de Crédito |       | Compañía Eléctrica Tarapacá S.A. |       | —                                          |       | 10,563,836 |   | — |   | 10,563,836 |   |
| Total                               |       |                                                 |       | 76,875,000                                      |       | 10,563,836 |   | — |   | 87,438,836 |   |

 

c.       Litigation and other legal actions:

 

The Company is party to various lawsuits arising inthe ordinary course of its business. Management considers it unlikely that anylosses associated with the pending lawsuits described below will significantlyaffect the Company or it subsidiaries’ results of operations, financialposition and cash flows, although no assurance can be given to such effect. Accordingly,the Company has established a provision for these lawsuits of ThCh$ 2,252,557 and ThCh$ 8,691,873 as of 31, 2004and 2005, respectively, which Management considers to be adequate. Managementdoes not believe that it is reasonably possible that the Company will incurlosses in excess of the established provision.

 

Thefollowing is a detail of significant pending lawsuits that have been filedagainst the Company, its subsidiaries and equity method investees. The lawsuitsare detailed by Company and the descriptions provide the court of lawoverseeing the lawsuit, a legal reference number, a general description of thelawsuit, the process status of the lawsuit and the amounts involved in thelawsuit. The most relevant cases are detailed below.

 

F-71

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

*Endesa-Chile*

 

i.Court: 24th Civil Tribunal of Santiago

Processnumber: 3622-2003

Plaintiff:Francisco Javier Errázuriz Talavera, Francisco Javier Errázuriz Ovalle, MatíasErrázuriz Ovalle

Defendants:Empresa Nacional de Electricidad S.A., FranciscoFernández Montero, Luis Felipe AcuñaRivas, Rene Agustín Lara Montoya, InversionesCirrus

Cause:Endesa-Chile, among others, was party to a criminal suit brought againstFrancisco Javier Errázuriz Talavera, Francisco Javier Errázuriz Ovalle andMatías Errázuriz Ovalle in 1998, which was later dismissed. Presently, thethree aforementioned men have brought a suit against Endesa-Chile and the otherparties involved in the original criminal suit seeking restitution for damagesrelated to the accusations of criminal wrongdoing.

Processstatus: A sentence was issued in favor of Endesa, and the Plaintiffs appealedthe decision. The appeal is pending.

Amountsinvolved: ThCh$ 1,400,000.

 

ii.Court: 30th Civil Tribunal of Santiago

Processnumber: 4061-2002

Plaintiff:Sociedad Punta de Lobos S.A.

Defendants:Endesa, Celta and the Chilean government

Cause:The plaintiff seeks annulment of any transfers or other judicial acts betweenEndesa and Celta related to the real estate that forms part of the maritimeconcession bestowed to Endesa in the Punta Patache sector, in the First Region.In this suit, the plaintiff also requests that the concession be declaredinvalid. Endesa presented evidence in its defense. The precautionary measureprohibiting any action or execution of contracts related to the maritimeconcession given to ENDESA and any real estate related to the concession ismaintained in force.

Processstatus: The parties have been called to a sentencing hearing.

Amountsinvolved: Undetermined.

 

iii.Court: 8th Civil Tribunal of Santiago

Processnumber: 129-2003

Plaintiff:Sociedad Punta de Lobos S.A.

Defendant:Endesa, Cía Eléctrica Tarapacá S.A. and Terminal Marítimo Minera Patache S.A.

Cause:The Plaintiff is suing for breach of contract with respect to the concession tooperate the Patache Port. Endesa S.A. maintains that no such contractualobligations regarding the concession exist. The Court prohibited the entry intoany contracts involving Patache Port, as a precautionary measure.

Processstatus: The case is pending appeal by the Plaintiff. The precautionary measureprohibiting any action or execution of contracts related to the maritimeconcession given to ENDESA and any real estate related to the concession ismaintained in force, except with respect to transfers of the Port betweenEndesa, Cía Eléctrica Tarapacá and Terminal Marítimo Puerto Patache.

Amountsinvolved : Undetermined.

 

iv.Court: 21st Civil Tribunal of Santiago

Processnumber: 553-2003

Plaintiff:Sociedad Punta de Lobos S.A.

Defendant:Chilean Treasury

Interestedthird party: Endesa

Cause:  The plaintiff requests that decree 139 islifted. In accordance with this decree, Endesa’s Marine Concession for shippingsalt via Puerto Patache was extended. Endesa is an interested party to thislawsuit. As a precautionary measure, an injunction was issued on any effects ofdecree 139, which is currently in effect.

ProcessStatus:  The parties were called to asentencing hearing. The injunction is pending the appeal process.

Amountsinvolved:  Undetermined.

 

F-72

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

v.Court: 7th Civil Tribunal of Santiago

Processnumber: 8895-2003

Plaintiff:Juan Francisco Aranguiz Córdoba, et al. (minority shareholders and formeremployees of Empresa Eléctrica Pangue).

Defendant:Empresa Eléctrica Pangue S.A. and Endesa

Cause:  Annulment of a contract allowing Endesa S.A.to voluntary use of water rights owned by Pangue signed on September 25, 2000,which the plaintiffs claim caused their stock, or stock they claim to haveowned during the signing of the contract but which is in question in a suitbrought by the same plaintiffs, as detailed below in “Pangue S.A., i)”, todecrease in value. They are seeking ThCh$ 2,521,996 (US$ 4,424,555) tocompensate the decrease in the stock’s value and US$ 1,742,211 in dividendsthey did not receive while they did not have legal possession of the contestedshares.

ProcessStatus:  The evidence submission periodhas ended, and the evidence validation is pending.

Amountsinvolved:  ThCh$ 3,604,380.

 

vi.Court: Court of Letters of Santa Bárbara

Processnumber: 1340-2004

Plaintiff:María Elena Teresa Sola Ruedi

Defendant: Endesa, Ministry ofEconomy and Superintendency of Electricity and Fuel.

Cause:  The plaintiff is seeking to replace aneasement with expropriation as well as payment for a greater flooded surface.In addition, the plaintiff is requesting that the amount of the indemnity paidfor the easement is recalculated.

ProcessStatus:  The court rejected Endesa’smotion to delay or abandon the proceedings. These resolutions are beingappealed.

Amountsinvolved:  Undetermined.

 

vii.Court: Court of Letters of Curacautín

Processnumber: 16007

Plaintiff:Sociedad Agrícola Lolco S.A.

Defendant: Endesa and Chileangovernment

Cause:  Suit against appraisal performed by “Commissionof Good Men” to determine the amount that Endesa should pay the proprietors offarms with easements established in relation to the electric concession grantedby Supreme Decree No. 31 on January 18, 2000 to construct the RalcoHydroelectric Center.

ProcessStatus:  The Appeals Court of Temucooverturned only a portion of the appealed sentence. An appeal before theSupreme Court is pending.

Amountsinvolved:  ThCh$ 1,125,693.

 

viii.Court: Court of Letters of Santa Bárbara

Processnumber: 3938

Plaintiff:Bunster Barrueto, et al.

Defendant:Endesa

Cause:Suit filed by Endesa with respect to the appraisals performed by “Commission ofGood Men” to determine the amount that Endesa should pay the proprietors offarms with easements established in relation to the electric concession grantedby Supreme Decree No. 31 on January 18, 2000 to construct the RalcoHydroelectric Center. In the same file, the defendants presented a claimagainst the appraisals performed by the Commission.

ProcessStatus:  The court ruled in favor ofEndesa. The Defendant is appealing at the Appeals Court of Concepción.

Amountsinvolved:  ThCh$ 2,574,000.

 

ix.Judicial claims against Superintendence of Energy and Fuel fines:

Court:Court of Appeals of Santiago

Process number: 5783-04

 

F-73

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

ClaimResolution number: 1439 from August 14, 2003.

Cause:Fine for general black-out on September 23, 2002

Processstatus: Pending resolution by the Court of Appeals

Amountsinvolved: Fine of 1,500 UTA

 

x.Ninth Civil Tribunal of Santiago

Processnumber: 15279-2005

Plaintiff:Jaime Arrieta Correa et. al.

Defendant:Chilean Treasury, Department of Water Resources and Endesa

Cause:  The Plaintiffs are suing to nullify Dept. ofWater Resolution No. 134, dated March 22, 2000, which gives Endesanon-consumptive water rights to carry out the Central Neltume project, withindemnities for damages. In addition, the Plaintiffs are suing for restitutionof damages allegedly suffered by the Plaintiffs for the loss of quality oflakefront property at Pirehueico lake and for the property devaluation.

ProcessStatus:  Endesa’s request to transfer thecase to a different jurisdiction was accepted, and the case will now bereviewed at the Ninth Civil Tribunal of Santiago.

Amountsinvolved:  Undetermined.

 

xi.24th Civil Tribunal of Santiago

Processnumber: 7957-2005

Plaintiff:Inversiones M.D. Ltda. et. al.

Defendant:Chilean Treasury, Department of Water Resources and Endesa

Cause:  The Plaintiffs are suing to nullify Dept. ofWater Resolution No. 134, dated March 22, 2000, which gives Endesanon-consumptive water rights to carry out the Central Neltume project, withindemnities for damages. In addition, the Plaintiffs are suing for restitutionof damages allegedly suffered by the Plaintiffs for the loss of quality oflakefront property at Pirehueico lake and for the property devaluation.

ProcessStatus:  The Chilean Treasury abstainedfrom the motion to transfer the case to a different jurisdiction. TheDefendants requested that this case be reviewed in conjunction with the case “Jordánet. al. vs. Chilean Treasury et. al.”, process number 1608-05, at the 10thCivil Tribunal of Santiago. This request is currently pending, and in themeantime there is an injunction on the entry into any contracts involvingEndesa’s water rights.

Amountsinvolved:  Undetermined.

 

xii.Tenth Civil Tribunal of Santiago

Processnumber: 1608-2005

Plaintiff:José Manuel Jordán Barahona et. al.

Defendant:Chilean Treasury, Department of Water Resources and Endesa

Cause:  The Plaintiffs are suing to nullify Dept. ofWater Resolution No. 134, dated March 22, 2000, which gives Endesanon-consumptive water rights to carry out the Central Neltume project, withindemnities for damages. In addition, the Plaintiffs are suing for restitutionof damages allegedly suffered by the Plaintiffs for the loss of quality oflakefront property at Pirehueico lake and for the property devaluation.

ProcessStatus:  The argument phase has ended. Theparties are waiting to be called to a settlement hearing.

Amountsinvolved:  Undetermined.

 

xiii.Ninth Civil Tribunal of Santiago

Processnumber: 13084-04

Plaintiff:Endesa, Pangue S.A. and Pehuenche S.A.

Defendant:Chilean Treasury

Cause:  The Plaintiffs are suing to nullify ResolutionNo. 35 issued by the Ministry of Finance, Development and Reconstruction onJune 15, 2004, because this resolution includes pronouncements on issues thatwere not originally matters of interest that required resolution.

 

F-74

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

ProcessStatus:  The parties are waiting to becalled to the sentencing hearing.

Amountsinvolved:  Undetermined.

 

xiv.19th Tribunal of Santiago

Processnumber: 2487-2005

Plaintiff:Empresa Eléctrica Guacolda S.A.

Defendant:Endesa, Pangue, Pehuenche and San Isidro

Cause:  Guacolda is suing for the right to receivepayment regarding electricity grid connection tolls from each of theDefendants, for electricity transmitted through the Maitencillo and Cardonessubstations.

ProcessStatus:  The judge requested evidenceregarding certain aspects of the lawsuit. Both parties objected to the evidencerequested, but only Endesa’s complaint was accepted by the court. Evidence iscurrently being presented to the court.

Amountsinvolved:  ThCh$ 423,594.

 

xv.12th Tribunal of Santiago

Processnumber: 2838-2005

Plaintiff:Sociedad Agrícola Ganadera and Forestal Las Cruces Ltda.

Defendant:Endesa

Cause:  The Plaintiffs are suing Endesa for the arbitraryand indiscriminate use of legal resources such that the Plaintiffs weredeprived of their water use rights, and the Plaintiffs seek restitution fordamages.

ProcessStatus:  The parties presented theirpretrial arguments, which are pending resolution by the court.

Amountsinvolved:  ThCh$ 2,423,662

 

xvi.Court of Letters of Santa Bárbara

Processnumber: 4563

Plaintiff:Luis Danús Covian et. al.

Defendant:Endesa and Pangue S.A.

Cause:  The Plaintiffs filed suit so that the Courtwill declare that the Plaintiffs and Defendants form a part of a community withrespect to the Fundo Ralco and therefore they have co-ownership rights.

ProcessStatus: The Court accepted the Plaintiffs’ motion, inasmuch as the additionalinterested parties are notified by Pangue and Endesa. This resolution wasappealed by the Defendants.

Amountsinvolved:  Undetermined

 

xvii.13th Tribunal of Santiago

Processnumber: 7358-2005

Plaintiff:María Victoria Ovalle Ovalle

Defendant:Endesa, Francisco Fernández Montero, Luis Felipe Acuña Rivas, René Agustín LaraMontoya and Inversiones Cirrus S.A.

Cause:  The Plaintiff filed suit against theDefendants for their involvement in a criminal suit brought against thePlaintiff’s husband and children. The criminal suit was dismissed, and thePlaintiff is seeking restitution for damages related to the accusations ofcriminal wrongdoing.

ProcessStatus:  Endesa was notified of the suit.Notification of the other defendants is pending.

Amountsinvolved:  ThCh$ 2,000,000

 

xviii.19th Tribunal of Santiago

Processnumber: 7361-2005

Plaintiff:María Victoria Errázuriz Ovalle

Defendant:Endesa, Francisco Fernández Montero, Luis Felipe Acuña Rivas, René Agustín LaraMontoya and Inversiones Cirrus S.A.

 

F-75

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

Cause:  The Plaintiff filed suit against theDefendants for their involvement in a criminal suit brought against thePlaintiff’s father and siblings. The criminal suit was dismissed, and thePlaintiff is seeking restitution for damages related to the accusations ofcriminal wrongdoing.

ProcessStatus:  Endesa was notified of the suitand requested that the other interested parties be informed, in accordance withthe Civil Proceedings Code, and that the proceeding be suspended. The Courtapproved both requests. The Plaintiff has not yet notified the other defendantsof the suit.

Amountsinvolved:  ThCh$ 600,000

 

xix. Court: Court of Appeals of Santiago

Processnumber: 10805-05

ClaimResolution number: 817 from April 27, 2004 and No. 1838 from November 3, 2005.

Cause:Fine for general black-out on January 13, 2003

Processstatus: Pending resolution by the Court of Appeals

Amountsinvolved: Fine of 560 UTA

 

OtherContingencies:

TheCompany is involved in other minor lawsuits that amount in aggregate to ThCh$1,165,766 as of December 31, 2005 (ThCh$ 3,363,500 in 2004).

 

*PehuencheS.A.*

 

i.Court: 20th Civil Court of Santiago

Process number: 5.863-2001

Plaintiff: Empresa Eléctrica Pehuenche S.A.

Defendant: Empresa Eléctrica Colbún S.A.

Cause: Pehuenche S.A. seeks fulfillment of contract with an indemnity fordamages related to services rendered by Pehuenche S.A. to Colbún S.A. duringthe last drought period. Colbún S.A. responded with a countersuit againstPehuenche S.A. seeking payment for losses from April and May 2001 related tothe sentence dictated by the Appeals Court of Talca that was later reversed bythe Supreme Court.

Process status: Pending appeals recourses inorder for the case to be recognized by the Court of Appeals of Santiago.

Amounts involved: ThUS$ 7,000.

 

ii.Court: Court of Appeals of Santiago

Processnumber: 5784-04

Plaintiff: Empresa Eléctrica Pehuenche S.A.

Defendant: Superintendency of Electricity andFuel

 

F-76

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

ClaimResolution number: 1429 from August 14, 2003.

Fine:1,500 UTA

Cause:Fine for general black-out on September 23, 2002

Processstatus: Pending examination by the Court of Appeals

Amountsinvolved: 1,500 UTA.

 

iii.Ninth Civil Tribunal of Santiago

Processnumber: 13084-04

Plaintiff:Endesa, Pangue S.A. and Pehuenche S.A.

Defendant:Chilean Treasury

Cause:  The Plaintiffs are suing to nullifyResolution No. 35 issued by the Ministry of Finance, Development andReconstruction on June 15, 2004, because this resolution includespronouncements on issues that were not originally matters of interest thatrequired resolution.

ProcessStatus:  The parties are waiting to becalled to the sentencing hearing.

Amountsinvolved:  Undetermined.

 

iv.19th Tribunal of Santiago

Processnumber: 2487-2005

Plaintiff:Empresa Eléctrica Guacolda S.A.

Defendant:Endesa, Pangue, Pehuenche and San Isidro

Cause:  Guacolda is suing for the right to receivepayment regarding electricity grid connection tolls from each of theDefendants, for electricity transmitted through the Maitencillo and Cardonessubstations.

ProcessStatus:  The judge requested evidenceregarding certain aspects of the lawsuit. Both parties objected to the evidencerequested, but only Endesa’s complaint was accepted by the court. Evidence iscurrently being presented to the court.

Amountsinvolved:  ThCh$ 423,594.

 

v.Court: Court of Appeals of Santiago

Processnumber: 10801-05

ClaimResolution number: 806 from April 27, 2004 and No. 1836 from November 3, 2005.

Cause:Fine for general black-out on January 13, 2003

Processstatus: Pending resolution by the Court of Appeals

Amountsinvolved: Fine of 560 UTA

 

*PangueS.A.*

 

i.Court: 7th Civil Tribunal of Santiago

Processnumber: 8895-2003

Plaintiff:Juan Francisco Aranguiz Córdoba, et al. (minority shareholders and formeremployees of Empresa Eléctrica Pangue).

Defendant:Empresa Eléctrica Pangue S.A. and Endesa

Cause:  Annulment of a contract allowing Endesa S.A.to voluntary use of water rights owned by Pangue signed on September 25, 2000,which the plaintiffs claim caused their stock, or stock they claim to haveowned during the signing of the contract but which is in question in a suitbrought by the same plaintiffs, as detailed below in “Pangue S.A., i)”, todecrease in value. They are seeking ThCh$ 2,521,996 (US$ 4,424,555) tocompensate the decrease in the stock’s value and US$ 1,742,211 in dividendsthey did not receive while they did not have legal possession of the contestedshares.

ProcessStatus:  The evidence submission periodhas ended, and the evidence validation is pending.

Amountsinvolved:  ThCh$ 3,604,380.

 

F-77

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

ii.Court: 2nd Civil Tribunal of Concepción

Processnumber: 6693-2003

Plaintiff:Municipality of Hualqui

Defendant:Empresa Eléctrica Pangue S.A.

Cause:The Municipality of Hualqui seeks repair and monetary compensation forenvironmental damage caused by the operation of the Pangue power plant during2001 and 2002. The plaintiff is specifically demanding construction of acontainment wall (which has a cost of ThCh$ 920,000), obligatory notificationwhen Pangue opens its floodgates, and damages of ThCh$ 1,000,000.

ProcessStatus: The Appeals Court of Concepción accepted Pangue S.A.’s appeal of theoriginal decision, and the resolution of this case is pending.

Amountsinvolved:  ThCh$ 1,920,000.

 

iii.Court: Court of Appeals of Santiago

Processnumber : 5785-04

ClaimResolution number: 1432 from August 14, 2003.

Cause:Fine for general black-out on September 23, 2002

Processstatus: Pending resolution by the Court of Appeals

Amountsinvolved: Fine of 1,000 UTA.

 

iv.Ninth Civil Tribunal of Santiago

Processnumber: 13084-04

Plaintiff:Endesa, Pangue S.A. and Pehuenche S.A.

Defendant:Chilean Treasury

Cause:  The Plaintiffs are suing to nullifyResolution No. 35 issued by the Ministry of Finance, Development andReconstruction on June 15, 2004, because this resolution includespronouncements on issues that were not originally matters of interest thatrequired resolution.

ProcessStatus:  The parties are waiting to becalled to the sentencing hearing.

Amountsinvolved:  Undetermined.

 

v.Court of Letters of Santa Bárbara

Processnumber: 4563

Plaintiff:Luis Danús Covian et. al.

Defendant:Endesa and Pangue S.A.

Cause:  The Plaintiffs filed suit so that the Courtwill declare that the Plaintiffs and Defendants form a part of a community withrespect to the Fundo Ralco and therefore they have co-ownership rights.

ProcessStatus: The Court accepted the Plaintiffs’ motion, inasmuch as the additionalinterested parties are notified by Pangue and Endesa. This resolution wasappealed by the Defendants.

Amountsinvolved:  Undetermined

 

vi.19th Tribunal of Santiago

Processnumber: 2487-2005

Plaintiff:Empresa Eléctrica Guacolda S.A.

Defendant:Endesa, Pangue, Pehuenche and San Isidro

Cause:  Guacolda is suing for the right to receivepayment regarding electricity grid connection tolls from each of theDefendants, for electricity transmitted through the Maitencillo and Cardonessubstations.

ProcessStatus:  The judge requested evidenceregarding certain aspects of the lawsuit. Both parties objected to the evidencerequested, but only Endesa’s complaint was accepted by the court. Evidence iscurrently being presented to the court.

Amountsinvolved:  ThCh$ 423,594.

 

F-78

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

viii.11. Court: Court of Appeals of Santiago

Processnumber: 10803-05

ClaimResolution number: 818 from April 27, 2004 and No. 1834 from November 3, 2005.

Cause:Fine for general black-out on January 13, 2003

Processstatus: Pending resolution by the Court of Appeals

Amountsinvolved: Fine of 560 UTA

 

*SanIsidro S.A.*

 

i.Court: Court of Appeals of Santiago

Processnumber : 5782-04

ClaimResolution number: 1428 from August 14, 2003.

Cause:Fine for general black-out on September 23, 2002

Processstatus: Pending resolution by the Court of Appeals

Amountsinvolved: Fine of 500 UTA.

 

ii.19th Tribunal of Santiago

Processnumber: 2487-2005

Plaintiff:Empresa Eléctrica Guacolda S.A.

Defendant:Endesa, Pangue, Pehuenche and San Isidro

Cause:  Guacolda is suing for the right to receivepayment regarding electricity grid connection tolls from each of theDefendants, for electricity transmitted through the Maitencillo and Cardonessubstations.

ProcessStatus:  The judge requested evidenceregarding certain aspects of the lawsuit. Both parties objected to the evidencerequested, but only Endesa’s complaint was accepted by the court. Evidence iscurrently being presented to the court.

Amountsinvolved:  ThCh$ 423,594.

 

iii.Court: Court of Appeals of Santiago

Processnumber: 10799-05

ClaimResolution number: 819 from April 27, 2004 and No. 1830 from November 3, 2005.

Cause:Fine for general black-out on January 13, 2003

Processstatus: Pending resolution by the Court of Appeals

Amountsinvolved: Fine of 350 UTA

* *

*CompañíaEléctrica de Tarapacá S.A. (Celta)*

 

i.Court: 8th Civil Tribunal of Santiago

Processnumber: 129-2003

Plaintiff:Sociedad Punta de Lobos S.A.

Defendant:Endesa, Cía Eléctrica Tarapacá S.A. and Terminal Marítimo Minera Patache S.A.

Cause:The Plaintiff is suing for breach of contract with respect to the concession tooperate the Patache Port. Endesa S.A. maintains that no such contractualobligations regarding the concession exist. The Court prohibited the entry intoany contracts involving Patache Port, as a precautionary measure.

Processstatus: The case is pending appeal by the Plaintiff. The precautionary measureprohibiting any action or execution of contracts related to the maritimeconcession given to ENDESA and any real estate related to the

concessionis maintained in force, except with respect to transfers of the Port betweenEndesa, Cía Eléctrica Tarapacá and Terminal Marítimo Puerto Patache.

Amountsinvolved : Undetermined.

 

F-79

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

ii.Court: 30th Civil Tribunal of Santiago

Processnumber: 4061-2003

Plaintiff : Sociedad Punta deLobos S.A.

Defendant:Endesa, Celta and Chilean government

Cause:The plaintiff seeks annulment of any transfers or other judicial acts betweenEndesa and Celta related to the real estate that forms part of the maritimeconcession bestowed to Endesa in the Punta Patache sector, in the First Region.In this suit, the plaintiff also requests that the concession be declared invalid.Endesa presented evidence in its defense. The precautionary measure prohibitingany action or execution of contracts related to the maritime concession givento ENDESA and any real estate related to the concession is maintained in force.

Processstatus: The parties have been called to a sentencing hearing.

Amountsinvolved: Undetermined.

 

*Hidroelectrica El Chocón S.A.*

 

On December 28, 2000 the Federal Public RevenuesAdministration—General Tax Services (FPRA-GTS) notified Hidroelectrica El ChocónS.A. that it owed Arg$ 328,256 of taxes related to failure to withhold incometax on certain payments made abroad for a bank loan obtained in 1994. It wasalso determined that Hidroelectrica El Chocón S.A. must pay Arg$ 745,797 forrelated accrued interest calculated as of December 20, 2000. Hidroelectrica El ChocónS.A. did not make these payments as it considered them relating to foreignsource income and therefore not subject to taxes. Hidroelectrica El Chocón S.A.entered a plea in which it objected to payment of the taxes. FPRA-GTS has alsofined Hidroelectrica El Chocón S.A. Arg$ 229,779 which Hidroelectrica El ChocónS.A appealed on February 20, 2001.

 

On December 28, 2000 Hidroelectrica El Chocón S.A. wasnotified that it owed accrued interest related to value-added-tax for theperiod from December 1993 to July 1995 amounting to Arg$ 148,533 as of December11, 2000, as well as an imposed fine of Arg$ 195,907. On February 20, 2001Hidroelectrica El Chocón S.A. filed an appeal with the courts under the premisethat Chilean law does not require payment of fines, including accruedinterests, for obligations or infractions committed before July 31, 1995.

 

On June 26, 2000, Hidroelectrica El Chocón S.A. wasnotified of a lawsuit for interest to be paid related to royalties, initiallyamounting to Arg$ 1,574. Additionally, on September 27, 2000, the Company wasnotified of a new complaint from the province of Neuquén against the State andhydroelectric generators of Comahue to obtain royalties earned on accumulated fundsin the Salex Account. The complaint does not state the precise amount or dateas of which the sums claimed are considered as owed, but seeks charges fromeach generator equal to 12% of the funds contributed to the account.

 

On September 10, 2001 Hidroelectrica El Chocón S.A.received notification from the Provincial Revenue Services of Buenos Aires thatit owed Arg$ 1,733 for tax on gross income for the fiscal periods from February1995 to December 1998 and that the fine was 10% of the allegedly unpaid amount.On December 28, 2001, Hidroelectrica El Chocón was notified that itadditionally ows taxes amounting to ThArg$984 for for the fiscal period fromFebruary 1998 to December 1998. On January 22, 2002, Hidroelectrica El ChocónS.A. filed an appeal citing erroneous computation of the amount owed and otherreasons as to why the taxes were not applicable.

 

Hidroelectrica El Chocón S.A. received notificationfrom the Provincial Revenue Services of the Rio Negro Province that a paymentof a real estate tax of Arg$ 393,328.40 in May 2004 is due because of areevaluation of the property of Arg$ 294,997,709. On October 25, 2004 theCompany responded with a claim that questioned the Revenue Service’sreevaluation of the tax payable of the property. The General Revenue Servicesent the company invoices to pay the amounts but the company has denied thatpayment is due. The case is pending.

Amounts involved: ThArg$ 4,774 in capital and interest.

 

F-80

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

*HidroinvestS.A.*

 

OnDecember 27, 2000 Hidroinvest S.A. was notified that it owed tax of ThArg$ 3,899to the Argentine IRS for gains realized in 1993 on the difference between theacquisition costs and transfer price of bonds.

 

Hidroinvestappealed this ruling before the Argentine Government Tribunal, which, in turn,confirmed the ruling of the Argentine IRS on May 26, 2004 with respect to thetaxes and interest owed, but revoked the imposed fine. Both the IRS andHidroinvest appealed the decision before the National Appeals Chamber.

 

Inorder to avoid further fines should the IRS’s ruling be upheld, Hidroinvestpaid the IRS ThArg$ 3,899 for capital and ThArg$ 13,645for interest on July 30,2004, leaving record that Hidroinvest was not in conformity with the paymentand that this payment was subject to the decision of the Appeals Chamber.

 

*EndesaCostanera S.A.*

*(Argentina)*

 

On July 25, 1990, the ItalianGovernment authorized a loan to the Argentine Government of up to ThUS$ 93,996to be used to finance purchases of goods and services or Italian origin,utilized in rehabilitating four groups of thermoelectric plants owned byServicios Eléctricos del Gran Buenos Aires (“SEGBA”). This loan financed theacquisition of goods and services included in Work Order No. 4322 (the “Order”),issued by SEGBA in favor of an Italian consortium lead by Ansaldo S.p.A. Inaccordance with the terms of the “Contract relative to work order no. 4322”:(i) SEGBA bestowed upon Endesa Costanera S.A. power to manage items related tothe work order; and (ii) Endesa Costanera was obligated to pay the NationalEnergy Secretary (the “Energy Secretary”) capital and interest payments derivedfrom the loan from the Italian Government, at an annual interest rate of 1.75 %(the “Contract”). A pledge was constituted on the class “A” shares of EndesaCostanera S.A. In case of noncompliance with the Contract, the Energy Secretarycan immediately proceed to sell the pledged shares and their corresponding politicalrights by public tender offer.

 

F-81

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

Inaccordance with Law No. 25.561, decree No. 214/02, the obligations contained inthe Contract have been “pesofied” at the rate of one peso to one U.S. dollar,plus a special stabilization coefficient (“CER”), with the original interestrate stated in the Contract. On January 10, 2003, decree No. 53/03 modifieddecree No. 410/02 by including exceptions to the “pesofication” of obligationsof provinces, municipalities, public and private sector companies that aredenominated in foreign currency and were originally financed by multilateralcredit organisms or originated in liabilities assumed by the National Treasuryand refinanced with external creditors. Endesa Costanera considers that thisexception does not apply to their loan and that decree No. 53/03 isunconstitutional because it violates principles of equality and property rightsestablished in the National Constitution. If the loan is determined to complywith the exception, Endesa Costanera would present a US$ 8 million decrease innet income and a US$ 21 million increase in indebtedness as of December 15,2005. To date, the Secretary of Energy has presented no complaint againstpayments made by Endesa Costanera S.A. at the US$ 1.00 to Arg$ 1.00 exchangerate. As of December 15, 2005, Endesa Costanera’s debt related to the Contract,including accrued interest, amounted to ThUS$ 19,400 (ThUS$ 20,656 in 2004).

 

Invirtue of the arrangement in Annex VI-A of the “Concurso Público Internacionalpara la Venta de las Acciones de Endesa Costanera Sociedad Anónima”(International Public Tender for the Sale of Shares of Endesa Costanera SociedadAnonymous), the domain of Endesa Costanera S.A.’s land was transferred subjectto the condition that it used as the location for an electric power plant for aterm of twenty five years as of the date of possession.

 

Ifunder any circumstance whatsoever the land ceases to be used for that purposeduring the indicated period, its domain shall be considered revoked due to thiscause, returning such title effective immediately, and as a matter of law, toSEGBA S.A. or, as applicable, to the National State.

 

Asof December 31, 2004, Endesa Costanera S.A. had a pledge on its SiemensCombines Cycle in favor of Banco Bilbao Vizcaya Argentaria S.A., Bank BostonN.A., Bank of America N.A., HSBC Bank plc, Banco Latinoamericano deExportaciones S.A., Banco Comafi (previously Scotiabank Quilmes) and JP Morgan ChaseBank in the amount of approximately ThUS$ 52,000. For purposes of therefinancing of the syndicated loan, as of December 15, 2005, Credit SuisseFirst Boston International is the beneficiary of this pledge, which was reducedto ThUS$ 40,000. In addition, as of December 15, 2005, ING Bank Curacaoparticipates in the pledge, as it relates to previously agreed-upon operations

 

OnSeptember 29, 2005, Endesa Costanera S.A. formalized a loan for ThUS$ 30,000with Credit Suisse First Boston International, to replace the syndicated loanand the loan with JP Morgan Chase Bank, for a period of 54 months. The loan ispayable in seven equal quarterly installments, the first of which is due onSeptember 30, 2008 and the last on March 31, 2010. On September 30, 2005, thebanks that participate in the syndicated loan and the JP Morgan Chase Bank loantransferred the entire remaining balance to Credit Suisse First BostonInternational.

 

EndesaCostanera S.A. has a pledge on the financed asset in favor of Mitsubishi Corporation,for the amount of ThUS$ 38,953.

 

F-82

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

*EdegelS.A.*

 

i.Edegel S.A. vs. SUNAT

 

FromNovember 2000 to October 2001, the Peruvian tax authority, the NationalSuperintendency of Tax Administration (SUNAT) audited the income taxes EdegelS.A. (Edegel) from 1996 to 1999. As a result of the audits, in December 2001,SUNAT imposed back taxes and related fines of ThUS$ 90,920. The principal errorwas related to the provision for depreciation of real estate, machinery andequipment during all the audited periods. The case was decided in favor ofSUNAT in administrative court and on August 1, 2004, Edegel appealed thisdecision. However, since then, Edegel acknowledged some errors, withdrawingthose items from the appeal, but still appealed the most significant items fromthe original appeal. In September, the court decided certain items in favor ofEdegel and others in favor of SUNAT.

 

OnDecember 27, 2004, Edegel was notified of back taxes, fines and interest due ofThUS$ 7,119 related principally to a technical assistance contract betweenEdegel and Generandes (its controlling entity). Edegel will appeal thisresolution. Edegel’s external legal advisors believe that a favorable outcomeis probable. On June 7, 2005, SUNAT issued a letter assigning two employees toreview this case, which is currently pending.

 

OnJuly 16, 1997, Talleres Moyopampa S.A. (formerly Empresa de GeneraciónEléctrica de Lima S.A.) was notified of a payment due of ThUS$ 351 and interestof ThUS$ 270 related to unpaid taxes from May and June of tax year 1994. OnAugust 15, 1997, Talleres Moyopampa S.A. appealed this resolution to SUNAT,claiming that a Contract they had with the Ministry of Economy and Financeduring the privatization process of ELECTROLIMA established that ELECTROLIMAwas solely responsible for any taxes determined by SUNAT and in 1994,ELECTROLIMA was in charge of the old Edegel S.A.’s administration. Again, SUNATruled against Talleres

 

MoyopampaS.A. Talleres Moyopampa S.A. appealed this decision to the Government Tribunal,which declared SUNAT’s ruling null and ordered SUNAT to issue a newpronouncement, taking into consideration the aforementioned Contract. On August12, 1998, SUNAT notified Edegel that it was liable for the aforementionedpayments related to Talleres Moyopampa S.A. 1994 taxes.

 

OnJanuary 21, 1999, Edegel appealed this resolution to the Government Tribunal,which once again declared SUNAT’s ruling null and ordered SUNAT to issue a newpronouncement, taking into consideration the aforementioned Contract.

 

OnOctober 31, 2005, SUNAT declared Edegel’s position to be unfounded, and orderedthe collection of the amounts owed. On November 24, 2005, SUNAT filed an appealof this decision. The amount involved is    ThUS$ 1,172.

 

ii. Edegel S.A. vs. Essalud

 

Thiscase was appealed in July 31, 1996 and has yet to be decided. Three issues arebeing discussed, which amount to ThUS$ 2,344.11 plus interest.

 

Processnumber: 0150350000212

Plaintiff:EDEGEL

Defendant:SUNAT (Peruvian Tax Authority)

Cause:  The Peruvian tax authority, the NationalSuperintendency of Tax Administration (SUNAT) audited the income taxes EdegelS.A. (Edegel) from 1996 to 1999.

ProcessStatus: On December 23, 2005, the tax authority issued resolutions limiting theaudit to interest during construction and other events. Edegel has 15 days tofile an appeal with the High Tax Court.

 

F-83

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

*Central Hidroeléctrica de Betanía S.A. ESP*

*(Colombia)*

 

i.Neiva Administrative Court

Processnumber: Ordinary process

Plaintiff:Consultoría Colombiana S.A. and Consultores Regionales Asociados Ltda

Defendant:ICEL—Electrificadora del Huila S.A. and Central Hidroeléctrica de Betania S.A.E.S.P.

Cause:  Damages for not awarding contract, afterperforming preliminary study of feasibility in 1992, relating to the El Quimboproject.

ProcessStatus:  The suit is in the evidence stage.

Amountsinvolved:  ThUS$ 1,000

 

ii.Various Courts in the Huila and Tolima Jurisdictions

Processnumber:

Plaintiff:364 individuals in various jurisdictions

Defendant: Central Hidroeléctricade Betania S.A. E.S.P.

Cause:  The Defendant is being sued for liability forthe flooding during 1986, 1989, 1994 and 1999, which allegedly damaged thecrops and property of the Plaintiffs.

ProcessStatus:  Decisions have already beenhanded down for some suits, some are in the evidence stage.

 

iii.3rd and 4th Circuit Courts of Neiva

Processnumber: Class action suit in response to the effects of the dam construction onthe local economy

Plaintiff:Fariel San Juan

Defendant: Central Hidroeléctrica de BetaniaS.A. E.S.P.

Cause:  The lawsuit relates to the construction of asystem that would allow fish to pass through during migration season. The waterwould be maintained at a fair and equitable level, and the Defendant would beordered to develop compensatory plans such as the construction of a fishprocessing and packing plant.

ProcessStatus:  The 3rd Circuit Courtset a new hearing date, for January 13, 2006.

The4th Circuit Court Judge declared the case out of his jurisdiction,and on June 2, 2005, the case was sent to the Administrative Arbitration Court,where it was also declared out of jurisdiction. Therefore, the jurisdictionaldispute will be resolved by the Supreme Court. This decision is pendingresolution.

Amountsinvolved: Undetermined.

 

iv.1st Circuit Court of Neiva

Processnumber: Ordinary process

Plaintiff:Empresa Antioqueña de Energía (EADE)

Defendant:Central Hidroeléctrica de Betania S.A. ESP.

Cause:  The Plaintiff is suing the Defendant forindemnities for noncompliance with energy supply obligations.

ProcessStatus:  The suit is in the evidencestage. The parties are trying to agree upon an out-of-court settlement.

Amountsinvolved: ThUS$ 3,495

 

*EmgesaS.A.*

 

i.Administrative Court of Cundinamarca, First Section

Processnumber: Class action suit

Plaintiff:Orlando Enrique Guaqueta and Sibaté residents

Defendant:Emgesa S.A. ESP., Empresa de Energía de Bogotá S.A. ESP (EEB) and CorporaciónAutónoma Regional (CAR)

Cause:  The Defendants are faced with anenvironmental contingency for damage allegedly produced in the Muña reservoir.

 

F-84

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

ProcessStatus: On January 28, 2005, The Fourth Section of the Administrative Court ofCundinamarca ordered the case sent to the First Section, which will determinewhether this case can be presented in conjunction with related cases, asrequested by CAR.

 

OnFebruary 10, 2005, there was a motion to resolve the appeal presented by Emgesaagainst the motion on      May 20, 2004to present evidence. The interviews and inspections of the 3,241 plaintiffswill not be accepted as evidence, given that other evidence will provide thenecessary information to clarify the facts.

Amountsinvolved: Approximately ThUS$ 1,200

 

ii.Administrative Court of Cundinamarca, Fourth Section

Processnumber: Class action suit

Plaintiff:Gustavo Moya

Defendant:Emgesa S.A. ESP., Empresa de Energía de Bogotá S.A. ESP (EEB), la Empresa deAcueducto y Alcantarillado de Bogotá, the Municipality of Sibaté and otherindustries and government entities that contribute to the pollution of theBogotá River.

Cause:  The Defendants are faced with anenvironmental contingency for damage allegedly produced in the Muña

 

ProcessStatus: On August 26, 2005, it was determined that the Court does not have thejurisdiction to hear the appeal by CAR against the Magsitrate Nelly Villamizar.The case was sent to the State Counsel to determine the resolution.

Inaddition, on December 5, the Vigilante Comité met with Magistrate NellyVillamizar, in order to present the progress of the works. Some of the mostimportant issues include the following:

 

1. By way of Resolution No. 2113 issued on November10, 2005, the CAR authorized a pilot test using herbicide and presented atimeline for application.

2. Before applying herbicide, EMGESA and EEB arewaiting for comments from the Social Protection Ministry.

 

TheMagistrate indicated that the activity progress reports received from EMGESAand EEB World be sent to the State Counsel so that it would be aware of theircompliance.

Withrespect to the State Counsel, on February 25, 2005, the motion against theappeal requested on            February17, 2005 was notified.

 

AmountsInvolved: Undetermined

 

iii.Court: Administrative Court of Cundinamarca, Fourth Section

Processnumber: Class action suit

Plaintiff:Miguel Angel Chávez - Nancy Stella Martínez Pulido, et al

Defendant:Emgesa et al

Cause:The Plaintiff seeks indemnities for damages caused by the dumping of pollutedwater from the Bogotá River in the Muña Reservoir

ProcessStatus: The case is currently being reviewed by the Magistrate, who is supposedto resolve the appeal filed against the court order to include the guarantorsas defendants and against the request for this case to be heard in conjunctionwith the case involving Orlando Enrique Guaqueta.

Amountsinvolved: ThUS$ 500 (Approximately).

 

iv.36th Circuit Court

Plaintiff:Héctor Moisés Camacho et al

Defendant:Emgesa S.A. ESP. and Chivor S.A. ESP.

Cause:  The lawsuit relates to flooding ofproperties.

 

F-85

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

ProcessStatus:  On October 1,, 2005, theSuperior Court of Bogotá accepted the Plaintiff’s appeal of the originaldecision. On October 25, the Court requested the Operating Manual for theopening of the floodgates of the Guavio dam. The manual was presented byEmgesa, and on December 6, copies of the manual were sent to the other parties.

Amountsinvolved: ThUS$ 1,800

 

d.      Restrictions:

 

TheCompany is in compliance with all financial ratios and covenants as of December31, 2005, detailed as follows:

 

*Endesa-Chile(Individual Legal Entity)*

 

Ona consolidated basis, the Company must comply with financial covenants andrequirements derived from loan agreements with financial institutions. Some ofthe more restrictive covenants are summarized as follows:

 

• Endesa’sratio of debt to cash flows for four quarters and of its Chilean subsidiariesdoes not exceed 9.40 for 2005;

• The ratio ofconsolidated debt to EBITDA for four consolidated quarters, does not exceed6.40 for 2005;

• The ratio ofEndesa-Chile and its Chilean subsidiaries’ cash flows to financial expenses forfour quarters, no less than 1.50 for 2005;

• Theconsolidated debt to shareholders’ equity plus minority interest does notexceed 112.5% for 2005;

• No less than50% of the total consolidated assets of Endesa-Chile should belong to companieswhose business is regulated;

• Minimumshareholders’ equity at least equal to UF 45,000,000.

 

*PehuencheS.A.*

 

Thecredit agreement with Chase Manhattan Bank N.A. imposes certain obligations andrestrictions on Pehuenche S.A., some of which are of a financial nature, suchas: long-term financial liabilities not exceeding 1.5 times the shareholders’equity, and a minimum Company equity of UF 9,500,000.

 

*EndesaCostanera S.A.*

 

Invirtue of the arrangement in Annex VI-A of the “Concurso Público Internacionalpara la Venta de las Acciones de Endesa Costanera Sociedad Anónima”(International Public Tender for the Sale of Shares of Endesa CostaneraSociedad Anonymous), the domain of Endesa Costanera S.A.’s land was transferredsubject to the condition that it used as the location for an electric powerplant for a term of twenty five years as of the date of possession.

 

Ifunder any circumstance whatsoever the land ceases to be used for that purposeduring the indicated period, its domain shall be considered revoked due to thiscause, returning such title effective immediately, and as a matter of law, toSEGBA S.A. or, as applicable, to the National State.

 

Themost significant requirements in respect to financial covenants are thosecontained in the Syndicated loan, the Agent of which is BBVA Banco Francés, andin the bilateral with JP Morgan, which are the following:

 

• Thelong-term debt with third parties cannot exceed US$ 215 million (excludingshort-term debt, commercial debt, intercompany loans, and debt with ItalianGovernment (see above)); short term debt of less than 180 days cannot exceedUS$ 10 million;

• Clauses thatrestrict change of control of the Company;

• Clauses thatrestrict payments to shareholders, including subordination of the debtassociated with certain financial indicators.

 

F-86

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

*EdegelS.A.*

 

Financialindicators originated by Bonds Program:

 

Ratioof total liabilities to Total equity, shall not be greater than 0.75.

 

*HidroeléctricaBetania S.A.*

 

Covenantsinclude limitations on the payment of related debt and limitations on change incontrol and the following financial ratios:

 

• Ratio of EBITDAto Senior Financial Debt shall not be less than 1.3.

• Ratio of cashFlows before Dividend Payments to Senior Financial Debt shall not be less than1.4.

• Ratio of shareholders’Equity to Senior Debt shall not be less than 2.5.

 

*Cross-DefaultProvisions:*

 

Asis customary for certain credit and capital market debt facilities, asubstantial portion of Endesa’s financial indebtedness is subject tocross-default provisions. Certain events including payment defaults andbankruptcy by Endesa or any of its subsidiaries, left uncured over time (inthose specific provisions which allow for a cure period), could result in across-default at the Endesa level and if a cross-default were to occur, part ofEndesa’s consolidated liabilities would eventually become due and payable.

 

Thenon-payment—after any applicable grace period—of debt pertaining to thiscompany or any of its relevant subsidiaries for an amount greater than theequivalent of US$ 30 million could give rise to the advance payment of thesyndicated credit subscribed in 2004. Similarly, the non-payment—after anyapplicable grace period—of debt pertaining to this company or any of itssubsidiaries for an individual amount greater than the equivalent of US$30million could give rise to the advance payment of Yankee bonds. Furthermore,some credit agreements contain provisions such that certain non-payment events,in this company or any of its relevant subsidiaries, such as bankruptcy, insolvency,adverse judicial settlements and expropriations of assets greater than US$50million, could cause the loan payment schedule to be accelerated.

 

Thecredit agreements do not contain clauses such that changes in the debt ratingof these companies would create an obligation to prepay the debt. However, achange in Standard & Poor’s (S&P) risk classification for debtdenominated in foreign currency would produce a change in the applicable marginof syndicated credits subscribed in 2004.

 

F-87

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**27.****                  ****Suretiesobtained from third parties:**

 

*Endesa-Chile(Individual Legal Entity)*

 

TheCompany has received guaranteed performance bonds from contractors and third partiesto guarantee performance and construction (mainly the Ralco Project) in theamount of ThCh$ 5,238,781 as of December 31, 2005 (ThCh$ 13,205,096 in 2004).

 

*CompañíaEléctrica de Tarapacá S.A.*

 

TheCompany has received documents in guarantee amounting to ThCh$ 0 as of December31, 2005

(ThCh$231,901 in 2004).

 

*EnigesaS.A.*

 

TheCompany has received documents in guarantee amounting to ThCh$ 55,073 as ofDecember 31, 2005

(ThCh$20,720 in 2004).

 

*PangueS.A.*

 

TheCompany has received documents in guarantee amounting to ThCh$ 0 as of December31, 2005

(ThCh$5,373 in 2004).

 

F-88

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**28.****                  ****Foreign currencies:**

# ** **

Asof December 31, 2004 and 2005, foreign currency denominated assets andliabilities are as follows:

 

a.               Assets:

 
| ** **                                 | ** ** | ** **   | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------|------------|--------------|------------|---------------------------------------|------------|
| **Account**                                | ** ** | **Currency** | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | ** **   | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** |
| Cash                                       |       | Ch$          |       | 581,181                               |       | 1,024,623 |   |
|                                       |       | US$          |       | 5,630,083                             |       | 327,565 |   |
|                                       |       | $ Col   |       | 22,431,682                            |       | 6,861,344 |   |
|                                       |       | Soles        |       | 482,699                               |       | 949,125 |   |
|                                       |       | $ Arg   |       | 1,222,152                             |       | 769,441 |   |
|                                       |       | Reales       |       | 357,436                               |       | 91,023 |   |
|                                       |       |         |       |                                  |       |   |   |
| Time deposits                              |       | US$          |       | 104,483,990                           |       | 26,194,480 |   |
|                                       |       | $ Col   |       | 73,730,606                            |       | 15,634,478 |   |
|                                       |       | Soles        |       | 1,108,145                             |       | 6,348,368 |   |
|                                       |       | $ Arg   |       | 4,204,150                             |       | 12,227,496 |   |
|                                       |       | Reales       |       | 9,843,141                             |       | 63,465 |   |
|                                       |       |         |       |                                  |       |   |   |
| Accounts receivable net                    |       | Ch$          |       | 40,049,926                            |       | 41,315,417 |   |
|                                       |       | US$          |       | 6,213,484                             |       | 4,771,219 |   |
|                                       |       | $ Col   |       | 25,537,874                            |       | 28,370,975 |   |
|                                       |       | Soles        |       | 3,522,176                             |       | 6,443,053 |   |
|                                       |       | $ Arg   |       | 15,764,687                            |       | 18,639,627 |   |
|                                       |       | Reales       |       | 18,163,629                            |       | — |   |
|                                       |       |         |       |                                  |       |   |   |
| Notes receivable                           |       | US$          |       | 215,030                               |       | — |   |
|                                       |       |         |       |                                  |       |   |   |
| Other accounts receivable net              |       | UF           |       | 2,109,073                             |       | 549,376 |   |
|                                       |       | Ch$          |       | 22,301,957                            |       | 21,912,853 |   |
|                                       |       | US$          |       | 376,542                               |       | 29,822 |   |
|                                       |       | $ Col   |       | 3,735,003                             |       | 6,049,953 |   |
|                                       |       | Soles        |       | 3,737,290                             |       | 3,305,441 |   |
|                                       |       | $ Arg   |       | 25,409                                |       | 22,038 |   |
|                                       |       | Reales       |       | 5,016,458                             |       | 4,785,782 |   |
|                                       |       |         |       |                                  |       |   |   |
| Accounts receivable from related companies |       | Ch$          |       | 13,119,001                            |       | 14,896,831 |   |
|                                       |       | US$          |       | 109,906,311                           |       | — |   |
|                                       |       | $ Col   |       | 20,626,253                            |       | 19,430,245 |   |
|                                       |       | Soles        |       | 3,525,346                             |       | 75,416 |   |
|                                       |       | $ Arg   |       | 3,429,515                             |       | 791,377 |   |
|                                       |       | Reales       |       | 1,745,989                             |       | 189,996 |   |

 

F-89

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| ** **               | ** ** | ** **   | ** ** | **As of December 31,** | ** ** |
|--------------------------|------------|--------------|------------|---------------------------------------|------------|
| **Account**              | ** ** | **Currency** | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **               | ** ** | ** **   | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** |
| Inventory, net           |       | Ch$          |       | 6,866,673                             |       | 13,088,707 |   |
|                     |       | US$          |       | 2,416,697                             |       | 3,048,350 |   |
|                     |       | $ Col   |       | 1,060,806                             |       | 2,859,750 |   |
|                     |       | Soles        |       | 3,822,746                             |       | 3,039,003 |   |
|                     |       | Reales       |       | 17,324                                |       | — |   |
|                     |       |         |       |                                  |       |   |   |
| Income taxes recoverable |       | Ch$          |       | 2,889,482                             |       | 1,313,804 |   |
|                     |       | US$          |       | 1,399,201                             |       | 1,241,788 |   |
|                     |       | Reales       |       | 20,696                                |       | — |   |
|                     |       | Soles        |       | 7,225                                 |       | — |   |
|                     |       | $ Arg   |       | 793,643                               |       | 3,085,173 |   |
|                     |       |         |       |                                  |       |   |   |
| Prepayments              |       | UF           |       | —                                |       | 10,265 |   |
|                     |       | Ch$          |       | 443,504                               |       | 251,929 |   |
|                     |       | US$          |       | 1,568,265                             |       | 600,721 |   |
|                     |       | $ Col   |       | 50,817                                |       | 37,925 |   |
|                     |       | Soles        |       | 762,342                               |       | 346,231 |   |
|                     |       | $ Arg   |       | 489,691                               |       | 364,900 |   |
|                     |       | Reales       |       | 17,324                                |       | — |   |
|                     |       |         |       |                                  |       |   |   |
| Deferred income tax      |       | Ch$          |       | 2,558,994                             |       | 2,093,092 |   |
|                     |       | $ Col   |       | 467,171                               |       | 388,475 |   |
|                     |       |         |       |                                  |       |   |   |
| Other current assets     |       | Ch$          |       | 11,603,927                            |       | 9,174,769 |   |
|                     |       | US$          |       | 1,132,914                             |       | — |   |
|                     |       | $ Col.  |       | 701,045                               |       | 1,025 |   |
|                     |       | Soles        |       | —                                |       | 1,868,416 |   |
|                     |       | $ Arg   |       | 60,786                                |       | 49,326 |   |
|                     |       | Reales       |       | 1,988,950                             |       | 129 |   |
|                     |       |         |       |                                  |       |   |   |
| Total current assets     |       |         |       | 564,336,441                           |       | 284,934,607 |   |

 

F-90

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| ** **               | ** ** | ** **   | ** ** | **As of December 31,** | ** ** |
|--------------------------|------------|--------------|------------|---------------------------------------|------------|
| **Fixed assets**    | ** ** | **Currency** | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **               | ** ** | ** **   | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** |
| Land                     |       | Ch$          |       | 31,088,155                            |       | 30,294,432 |   |
|                     |       | $ Col   |       | 11,253,665                            |       | 10,088,563 |   |
|                     |       | Soles        |       | 241,833                               |       | 206,050 |   |
|                     |       | $ Arg   |       | 5,526,353                             |       | 4,904,625 |   |
|                     |       | Reales       |       | 357,452                               |       | — |   |
|                     |       |         |       |                                  |       |   |   |
| Construction in progress |       | Ch$          |       | 3,108,415,638                         |       | 3,160,513,070 |   |
|                     |       | $ Col   |       | 1,541,711,711                         |       | 1,372,180,313 |   |
|                     |       | Soles        |       | 270,845,694                           |       | 240,713,438 |   |
|                     |       | $ Arg   |       | 272,121,801                           |       | 241,507,425 |   |
|                     |       | Reales       |       | 468,623,223                           |       | — |   |
|                     |       |         |       |                                  |       |   |   |
| Machinery and equipment  |       | Ch$          |       | 43,362,810                            |       | 12,553,322 |   |
|                     |       | $ Col   |       | 14,139,265                            |       | 12,702,313 |   |
|                     |       | Soles        |       | 351,533,662                           |       | 317,595,645 |   |
|                     |       | $ Arg   |       | 624,336,460                           |       | 569,359,163 |   |
|                     |       | Reales       |       | 27,180                                |       |   |   |
|                     |       |         |       |                                  |       |   |   |
| Other fixed assets       |       | Ch$          |       | 49,929,133                            |       | 56,308,254 |   |
|                     |       | $ Col   |       | 17,020,823                            |       | 14,951,163 |   |
|                     |       | Soles        |       | 11,041,624                            |       | 12,511,679 |   |
|                     |       | $ Arg   |       | 7,682,613                             |       | 6,830,898 |   |
|                     |       | Reales       |       | 3,403,336                             |       | — |   |

 

F-91

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| ** **                | ** ** | ** **   | ** ** | **As of December 31,** | ** ** |
|---------------------------|------------|--------------|------------|---------------------------------------|------------|
| **Fixed assets**     | ** ** | **Currency** | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                | ** ** | ** **   | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** |
| Technical  appraisal      |       | Ch$          |       | 11,667,223                            |       | 11,667,226 |   |
|                      |       | $ Col   |       | 58,988,193                            |       | 52,351,875 |   |
|                      |       | Soles        |       | 406,607,470                           |       | 360,863,123 |   |
|                      |       | Reales       |       | 108,750,783                           |       | — |   |
|                      |       |         |       |                                  |       |   |   |
| Accumulated  depreciation |       | Ch$          |       | (1,363,259,171                        | )          | (1,438,674,463 | ) |
|                      |       | $ Col   |       | (384,946,610                          | )          | (373,179,438 | ) |
|                      |       | Soles        |       | (398,493,032                          | )          | (369,352,267 | ) |
|                      |       | $ Arg   |       | (410,758,780                          | )          | (396,796,591 | ) |
|                      |       | Reales       |       | (225,569,522                          | )          | — |   |
|                      |       |         |       |                                  |       |   |   |
| Total fixed  assets       |       |         |       | 4,635,648,985                         |       | 3,910,099,818 |   |

 
| ** **                       | ** ** | ** **   | ** ** | **As of December 31,** | ** ** |
|----------------------------------|------------|--------------|------------|---------------------------------------|------------|
| **Other assets**            | ** ** | **Currency** | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                       | ** ** | ** **   | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** |
| Investments in related companies |       | Ch$          |       | 114,272,172                           |       | 94,363,467 |   |
|                             |       | US$          |       | 58,792,902                            |       | 375,659,426 |   |
|                             |       | $ Arg   |       | —                                |       | 38,950 |   |
|                             |       |         |       |                                  |       |   |   |
| Investments in other companies   |       | Ch$          |       | 2,463,663                             |       | 2,427,069 |   |
|                             |       | $ Col   |       | 21,043,453                            |       | 16,588,601 |   |
|                             |       | Soles        |       | 8,009                                 |       | 7,108 |   |
|                             |       | $ Arg   |       | —                                |       | 38,950 |   |
|                             |       |         |       |                                  |       |   |   |
| Goodwill                         |       | Ch$          |       | 3,226,784                             |       | 3,042,276 |   |
|                             |       | US$          |       | 423,025                               |       | 346,179 |   |
|                             |       | $ Col   |       | 16,665,102                            |       | 13,638,138 |   |
|                             |       |         |       |                                  |       |   |   |
| Negative goodwill                |       | Ch$          |       | (13,286,585                           | )          | (9,309,327 | ) |
|                             |       | US$          |       | (7,856,919                            | )          | (1,668,604 | ) |
|                             |       | $ Col   |       | (2,662,120                            | )          | (2,180,688 | ) |
|                             |       | Soles        |       | (34,148,458                           | )          | (22,965,058 | ) |

 

F-92

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| ** **                         | ** ** | ** **   | ** ** | **As of December 31,** | ** ** |
|------------------------------------|------------|--------------|------------|---------------------------------------|------------|
| **Other assets**              | ** ** | **Currency** | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **   | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** |
| Long-term receivables              |       | UF           |       | 530,111                               |       | — |   |
|                               |       | Ch$          |       | 1,319,416                             |       | 1,011,302 |   |
|                               |       | US$          |       | 3,635,961                             |       | 2,052,250 |   |
|                               |       | Soles        |       | —                                |       | 308,184 |   |
|                               |       | $ Arg   |       | 4,694,383                             |       | 23,065,063 |   |
|                               |       | Reales       |       | 26,108,987                            |       | — |   |
|                               |       |         |       |                                  |       |   |   |
| Receivables from Related companies |       | Ch$          |       | 346,507                               |       | 22,752,536 |   |
|                               |       | US$          |       | —                                |       | 67,074,825 |   |
|                               |       |         |       |                                  |       |   |   |
| Other long-term assets             |       | Ch$          |       | 31,009,400                            |       | 25,292,827 |   |
|                               |       | US$          |       | 23,901,908                            |       | 29,048 |   |
|                               |       | $ Col   |       | 37,894,060                            |       | 51,920,863 |   |
|                               |       | $ Arg   |       | 276,523                               |       | 764,321 |   |
|                               |       | Soles        |       | 20,193,264                            |       | 15,138,737 |   |
|                               |       | Reales       |       | 258,128                               |       | — |   |
| Total other  assets                |       |         |       | 309,109,676                           |       | 679,436,443 |   |

 
| ** **                                  | ** ** | ** **   | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------|------------|--------------|------------|---------------------------------------|------------|
| **Total assets by currency** | ** ** | **Currency** | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | ** **   | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** |
|                                        |       | UF           |       | 2,639,184                             |       | 559,641 |   |
|                                        |       | Ch$          |       | 2,120,969,790                         |       | 2,077,314,016 |   |
|                                        |       | US$          |       | 312,239,394                           |       | 479,707,069 |   |
|                                        |       | $ Col   |       | 1,479,448,799                         |       | 1,248,695,873 |   |
|                                        |       | Soles        |       | 644,798,035                           |       | 577,401,692 |   |
|                                        |       | $ Arg   |       | 529,869,386                           |       | 485,685,263 |   |
|                                        |       | Reales       |       | 419,130,514                           |       | 5,107,314 |   |
| Total assets                                |       |         |       | 5,509,095,102                         |       | 4,874,470,868 |   |

 

F-93

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

b.              Current liabilities: 

 
| ** **                             | ** ** | ** **   | ** ** | **Within 90 days**                    | ** ** | **91 days to 1 year**       | ** ** |
|----------------------------------------|------------|--------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                             | ** ** | ** **   | ** ** | **as of December 31, 2004** | ** ** | **as of December 31, 2005** | ** ** | **as of December 31, 2004** | ** ** | **as of December 31, 2005** | ** ** |
| ** **                             | ** ** | ** **   | ** ** | ** **                                      | ** ** | **Average**                                     | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Account**                            | ** ** | **Currency** | ** ** | **Amount**                                      | ** ** | **Rate**                                        | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
|                                   |       |         |       | **ThCh$**                                       |       |                                            |       | **ThCh$** |   |   |   | **ThCh$** |   |   |   | **ThCh$** |   |   |   |
|                                   |       |         |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Short-term debt  due to banks and      |       | UF           |       | —                                          |       |                                            |       | 5 |   | 0.30 | % | — |   |   |   | — |   |   |   |
| financial                              |       | Ch$          |       | 2,513,836                                       |       | 3.00                                            | %          | — |   |   |   | — |   |   |   | — |   |   |   |
| Institutions                           |       | US$          |       | 45,490,122                                      |       | 3.48                                            | %          | 3,005,734 |   | 4.49 | % | — |   |   |   | 3,464,501 |   | 6.10 | % |
|                                   |       | $  Col  |       | 40,681,352                                      |       | 7.06                                            | %          | 3,231,826 |   | 8.94 | % | — |   |   |   | — |   |   |   |
|                                   |       | Soles        |       | 10,745,827                                      |       | 7.06                                            | %          | 557,241 |   | 5.00 | % | — |   |   |   | — |   |   |   |
|                                   |       | Arg.         |       |                                            |       |                                            |       |   |   |   |   | — |   |   |   | 2,072,549 |   | 9.50 | % |
| Current portion  of                    |       | UF           |       |                                            |       |                                            |       | 1,788,047 |   |   |   | 1,761,618 |   | 9.00 | % |   |   |   |   |
| long-term debt                         |       | US$          |       | 4,025,590                                       |       | 4.02                                            | %          | 91,119 |   |   |   | 63,743,919 |   | 7.14 | % | 11,435,195 |   | 5.45 | % |
| due to banks and                       |       | Euro         |       | —                                          |       |                                            |       | — |   |   |   | 129,909 |   | 3.00 | % | — |   |   |   |
| financial                              |       | Soles        |       | —                                          |       |                                            |       | 6,828 |   | 4.41 | % | — |   |   |   | — |   |   |   |
| institutions                           |       | Yen          |       | —                                          |       |                                            |       | — |   |   |   | 427,679 |   | 0.90 | % | — |   |   |   |
|                                   |       | $  Arg  |       |                                            |       |                                            |       | 910,010 |   | 1.75 | % | 1,852,156 |   | 1.75 | % | 893,478 |   | 1.75 | % |
|                                   |       | Reales       |       | 1,861,174                                       |       | 17.25                                           | %          | — |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | U.P.         |       | —                                          |       |                                            |       | — |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | $  Col  |       | —                                          |       |                                            |       | — |   |   |   | 15,061,760 |   | 12.45 | % | 13,762,063 |   | 12.00 | % |
|                                   |       | £       |       | —                                          |       |                                            |       | — |   |   |   | 430,284 |   | 5.88 | % |   |   |   |   |
| Current portion  of                    |       | UF           |       | —                                          |       |                                            |       |   |   |   |   | 7,947,002 |   | 6.00 | % | 112,904,405 |   | 6.19 | % |
| bonds payable                          |       | US$          |       | 14,154,632                                      |       | 8.25                                            | %          | 16,322,283 |   | 7.00 | % | 33,916,561 |   | 8.00 | % | 108,338,451 |   | 7.48 | % |
|                                   |       | $ Col   |       | 5,418,367                                       |       | 12.54                                           | %          | 42,949,038 |   | 11.14 | % | — |   |   |   | — |   |   |   |
|                                   |       | Soles        |       | 17,985,917                                      |       | 5.98                                            | %          | 22,933,661 |   | 5.00 | % | — |   |   |   | — |   |   |   |
| Current portion  of long term payables |       | US$          |       | 6,803,447                                       |       | 7.44                                            | %          | 13,200,462 |   | 7.42 | % | 18,828,292 |   | 7.44 | % | 14,503,751 |   | 7.42 | % |
|                                   |       | $  Arg  |       | —                                          |       |                                            |       |   |   |   |   | — |   |   |   |   |   |   |   |
| Dividends payable                      |       | Ch $         |       | 111,595                                         |       |                                            |       | 1,078,821 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | $ Col.  |       |                                            |       |                                            |       | 3,555,229 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | Soles        |       | —                                          |       |                                            |       | 55,485 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | $ Arg.  |       | 703                                             |       |                                            |       | 616 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | Reales       |       | 71,796                                          |       |                                            |       | — |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       |         |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Miscellaneous  payables                |       | Ch $         |       | 773,997                                         |       |                                            |       | 7,676,967 |   |   |   | 6,161,834 |   |   |   | — |   |   |   |
|                                   |       | US$          |       | —                                          |       |                                            |       | — |   |   |   | 745,598 |   |   |   | 8,837,633 |   |   |   |
|                                   |       | $ Col.  |       | 3,551,996                                       |       |                                            |       | 2,487,675 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | Soles        |       | 3,595,685                                       |       |                                            |       | 7,607,402 |   |   |   | 2,153,262 |   |   |   | — |   |   |   |
|                                   |       | $ Arg.  |       | 59                                              |       |                                            |       | 51 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | Reales       |       | 984,663                                         |       |                                            |       | 72 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       |         |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                       |       | UF           |       | —                                          |       |                                            |       | 26,816 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | Ch$          |       | 56,761,352                                      |       |                                            |       | 21,244,132 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | US$          |       | 2,342,332                                       |       |                                            |       | 2,980,144 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | Euro         |       | 205,776                                         |       |                                            |       | 174,187 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | $ Col.  |       | 4,430,899                                       |       |                                            |       | 6,931,051 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | Soles        |       | 4,992,721                                       |       |                                            |       | 6,539,409 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | $ Arg.  |       | 14,323,019                                      |       |                                            |       | 18,039,590 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | Reales       |       | 907,271                                         |       |                                            |       | 511 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       |         |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts payable  to related           |       | US$          |       | 429,883                                         |       |                                            |       | — |   |   |   | — |   |   |   | 169,142 |   |   |   |
| companies                              |       | Ch$          |       | 2,457,055                                       |       |                                            |       | 3,257,549 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | Reales       |       | —                                          |       |                                            |       | 22,940 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | $  Col  |       | 3,708,121                                       |       |                                            |       | 3,590,838 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | Soles        |       | 18,189                                          |       |                                            |       | 122,111 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | $  Arg  |       | —                                          |       |                                            |       | 7,781 |   |   |   | — |   |   |   | — |   |   |   |

 

F-94

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| ** **                 | ** ** | ** ** | ** ** | **Scheduled Maturities**                   | ** ** |
|----------------------------|------------|------------|------------|-------------------------------------------------|------------|
| ** **                 | ** ** | ** ** | ** ** | **Within 90 days**                    | ** ** | **91 days to 1 year** | ** ** |
| ** **                 | ** ** | ** ** | ** ** | **As of December 31, 2004** | ** ** | **As of December 31, 2005** | ** ** | **As of December 31, 2004** | ** ** | **As of December 31, 2005** | ** ** |
| ** **                 | ** ** | ** ** | ** ** | **Amount**                                      | ** ** | **Average  Rate** | ** ** | **Amount** | ** ** | **Average  Rate** | ** ** | **Amount** | ** ** | **Average  Rate** | ** ** | **Amount** | ** ** | **Average  Rate** | ** ** |
|                       |       |       |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accrued income             |       | Ch$        |       | 38,791                                          |       |   |   | 6,219 |   |   |   | 187,305 |   |   |   | 671,304 |   |   |   |
|                       |       |       |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accrued liabilities        |       | UF         |       | 72,020                                          |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
|                       |       | Ch$        |       | 1,822,821                                       |       |   |   | 3,111,077 |   |   |   | 7,546,789 |   |   |   | 12,774,751 |   |   |   |
|                       |       | US$        |       | —                                          |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
|                       |       | $ Col      |       | 3,970,659                                       |       |   |   | 4,666,313 |   |   |   | — |   |   |   | — |   |   |   |
|                       |       | Soles      |       | 1,483,448                                       |       |   |   | 203,476 |   |   |   | — |   |   |   | 1,545,242 |   |   |   |
|                       |       | $ Arg      |       | 763,411                                         |       |   |   | 543,251 |   |   |   | — |   |   |   | — |   |   |   |
|                       |       | Reales     |       | 114,338                                         |       |   |   | — |   |   |   | — |   |   |   | 2,273 |   |   |   |
| Withholdings               |       | Ch$        |       | 4,381,709                                       |       |   |   | 2,336,788 |   |   |   | — |   |   |   | — |   |   |   |
|                       |       | $ Col      |       | 683,143                                         |       |   |   | 552,988 |   |   |   | — |   |   |   | — |   |   |   |
|                       |       | Soles      |       | 1,704,433                                       |       |   |   | 1,795,301 |   |   |   | — |   |   |   | — |   |   |   |
|                       |       | $ Arg      |       | 4,398,961                                       |       |   |   | 3,360,592 |   |   |   | 53,168 |   |   |   | 2,992 |   |   |   |
|                       |       | Reales     |       | 5,686                                           |       |   |   | 4,929 |   |   |   | — |   |   |   | — |   |   |   |
| Income tax payables        |       | Ch $       |       | 276,925                                         |       |   |   | — |   |   |   | 496,499 |   |   |   | — |   |   |   |
|                       |       | $ Col      |       | 8,945,998                                       |       |   |   | 10,569,301 |   |   |   | — |   |   |   | — |   |   |   |
|                       |       | Soles      |       | 424                                             |       |   |   | 4,707,360 |   |   |   | — |   |   |   | — |   |   |   |
|                       |       | $ Arg      |       | 345,903                                         |       |   |   | 908,867 |   |   |   | — |   |   |   | — |   |   |   |
|                       |       | Reales     |       | 3,960,841                                       |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
| Other current  liabilities |       | UF         |       | —                                          |       |   |   | — |   |   |   | 386,556 |   |   |   | 12,989,960 |   |   |   |
|                       |       | Ch $       |       | 580                                             |       |   |   | — |   |   |   | 98,228 |   |   |   | 94,815 |   |   |   |
|                       |       | US$        |       | —                                          |       |   |   | — |   |   |   | 775,706 |   |   |   | 12 |   |   |   |
|                       |       | $ Arg |       | 174,395                                         |       |   |   | 139,913 |   |   |   | — |   |   |   | — |   |   |   |
|                       |       | Reales     |       | 35,225                                          |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
| Total current  liabilities |       | UF         |       | 72,020                                          |       |   |   | 1,814,868 |   |   |   | 10,095,176 |   |   |   | 125,894,365 |   |   |   |
| per currency               |       | Ch$        |       | 69,138,661                                      |       |   |   | 38,711,553 |   |   |   | 14,490,655 |   |   |   | 13,540,870 |   |   |   |
|                       |       | US$        |       | 73,246,006                                      |       |   |   | 35,599,742 |   |   |   | 118,010,076 |   |   |   | 146,748,685 |   |   |   |
|                       |       | Euro       |       | 205,776                                         |       |   |   | 174,187 |   |   |   | 129,909 |   |   |   | — |   |   |   |
|                       |       | Yen        |       | —                                          |       |   |   | — |   |   |   | 427,679 |   |   |   | — |   |   |   |
|                       |       | $ Col      |       | 71,390,535                                      |       |   |   | 78,534,259 |   |   |   | 15,061,760 |   |   |   | 13,762,063 |   |   |   |
|                       |       | Soles      |       | 40,526,645                                      |       |   |   | 44,528,274 |   |   |   | 2,153,262 |   |   |   | 1,545,242 |   |   |   |
|                       |       | $ Arg      |       | 20,006,451                                      |       |   |   | 23,910,671 |   |   |   | 1,905,323 |   |   |   | 2,969,019 |   |   |   |
|                       |       | Reales     |       | 7,940,994                                       |       |   |   | 28,452 |   |   |   | — |   |   |   | 2,273 |   |   |   |
|                       |       | £     |       | —                                          |       |   |   | — |   |   |   | 430,284 |   |   |   | — |   |   |   |
| Total current liabilities  |       |       |       | 282,527,087                                     |       |   |   | 223,302,006 |   |   |   | 162,704,124 |   |   |   | 304,462,517 |   |   |   |

 

F-95

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

c.               Long-term liabilities, December 31, 2005:

 
| ** **                                              | ** ** | ** **         | ** ** | **Scheduled  maturity** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                              | ** ** | ** **         | ** ** | **1 to 3  years**       | ** ** | **3 to 5  years** | ** ** | **5 to 10  years** | ** ** | **More  than 10 years** | ** ** |
| **Account**                                             | ** ** | **Currency ** | ** ** | **Amount**              | ** ** | **Average  Rate** | ** ** | **Amount** | ** ** | **Average  Rate** | ** ** | **Amount** | ** ** | **Average  Rate** | ** ** | **Amount** | ** ** | **Average  Rate** | ** ** |
|                                                    |       |               |       | **ThCh$**               | ** ** | ** ** | ** ** | **ThCh$** | ** ** | ** ** | ** ** | **ThCh$** | ** ** | ** ** | ** ** | **ThCh$** |   |   |   |
|                                                    |       |               |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term  debt due to banks and financial institutions |       | UF                 |       | 951,856                 |       | 9.00 | % | — |   |   |   | — |   |   |   | — |   |   |   |
|                                                    |       | US$                |       | 30,421,943              |       | 7.33 | % | 20,975,086 |   | 8.56 | % | 74,124,524 |   | 6.00 | % | — |   |   |   |
|                                                    |       | Soles              |       | 15,012,023              |       | 5.52 | % | — |   |   |   | — |   |   |   | — |   |   |   |
|                                                    |       | $ Arg         |       | 3,573,912               |       | 1.75 | % | 3,573,912 |   | 1.75 | % | 893,301 |   | 1.75 | % | — |   |   |   |
|                                                    |       | $ Col.        |       | —                  |       |   |   | 13,088,002 |   | 12.00 | % | — |   |   |   | — |   |   |   |
| Bonds  payable                                          |       | UF                 |       | 71,899,240              |       | 6.20 | % | 71,899,240 |   | 4.80 | % | — |   |   |   | 26,962,215 |   | 6.20 | % |
|                                                    |       | US$                |       | 235,750,000             |       | 7.86 | % | 215,250,000 |   | 8.39 | % | 317,750,000 |   | 8.29 | % | 238,977,212 |   | 7.64 | % |
|                                                    |       | $  Col.            |       | 13,461,776              |       | 9.31 | % | 57,203,721 |   | 10.98 | % | 114,426,441 |   | 10.92 | % | — |   |   |   |
|                                                    |       | Soles              |       | 14,649,045              |       | 6.06 | % | 15,684,203 |   | 6.85 | % | — |   |   |   | — |   |   |   |
| Long-term  notes payable                                |       | US$                |       | 43,531,750              |       | 7.42 | % |   |   |   |   | 9,158,375 |   | 7.42 | % |   |   |   |   |
| Miscellaneous                                           |       | UF                 |       | —                  |       |   |   | — |   |   |   | — |   |   |   | 107,460 |   |   |   |
|                                                    |       | Ch$                |       | 177,356                 |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
|                                                    |       | US$                |       | 7,019,086               |       |   |   | 1,757,885 |   |   |   | 5,497,426 |   |   |   | 14,910,775 |   |   |   |
| Accrued  expenses                                       |       | Ch$                |       | 1,195,814               |       |   |   | 722,230 |   |   |   | 1,752,535 |   |   |   | 5,996,860 |   |   |   |
|                                                    |       | $  Col             |       | 18,601,188              |       |   |   | 299,300 |   |   |   | — |   |   |   | — |   |   |   |
| Other  long-term liabilities                            |       | Ch$                |       | 24,198,139              |       |   |   | 3,518,405 |   |   |   | 15,730,101 |   |   |   | 26,673,747 |   |   |   |
|                                                    |       | $ Arg.        |       | 3,682,290               |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
|                                                    |       | Soles              |       | —                  |       |   |   | 29,354,588 |   |   |   | — |   |   |   | — |   |   |   |
|                                                    |       | US$                |       | 134,856                 |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
| Total  long-term liabilities                            |       | UF                 |       | 72,851,096              |       |   |   | 71,899,240 |   |   |   | — |   |   |   | 27,069,675 |   |   |   |
| per  currency                                           |       | Ch$                |       | 25,571,309              |       |   |   | 4,240,635 |   |   |   | 17,482,636 |   |   |   | 32,670,607 |   |   |   |
|                                                    |       | US$                |       | 316,857,635             |       |   |   | 237,982,971 |   |   |   | 406,530,325 |   |   |   | 253,887,987 |   |   |   |
|                                                    |       | $  Col             |       | 32,062,964              |       |   |   | 70,591,023 |   |   |   | 114,426,441 |   |   |   | — |   |   |   |
|                                                    |       | Soles              |       | 29,661,068              |       |   |   | 45,038,791 |   |   |   | — |   |   |   | — |   |   |   |
|                                                    |       | $  Arg.            |       | 7,256,202               |       |   |   | 3,573,912 |   |   |   | 893,301 |   |   |   | — |   |   |   |
|                                                    |       |               |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  long-term liabilities                            |       |               |       | 484,260,274             |       |   |   | 433,326,572 |   |   |   | 539,332,703 |   |   |   | 313,628,269 |   |   |   |

 

F-96

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

d.              Long-term liabilities as of December 31, 2004:

 
| ** **                             | ** ** | ** **         | ** ** | **Schedule  Maturities** | ** ** |
|----------------------------------------|------------|--------------------|------------|--------------------------|------------|
| ** **                             | ** ** | ** **         | ** ** | **1 to 3  years**        | ** ** | **3 to 5  years** | ** ** | **5 to 10  years** | ** ** | **More  than 10 years** | ** ** |
| **Account**                            | ** ** | **Currency ** | ** ** | **Amount**               | ** ** | **Average  Rate** | ** ** | **Amount** | ** ** | **Average  Rate** | ** ** | **Amount** | ** ** | **Average  Rate** | ** ** | **Amount** | ** ** | **Average  Rate** | ** ** |
|                                   |       |               |       | **ThCh$**                | ** ** | ** ** | ** ** | **ThCh$** | ** ** | ** ** | ** ** | **ThCh$** | ** ** | ** ** | ** ** | **ThCh$** |   |   |   |
|                                   |       |               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt  due to banks and                 |       | UF                 |       | 1,759,654                |       | 9.00 | % | 1,044,889 |   | 9.00 | % | — |   |   |   | — |   |   |   |
| financial  institutions                |       | US$                |       | 40,978,185               |       | 6.62 | % | 157,850,976 |   | 3.14 | % | 14,608,625 |   | 5.15 | % | 944,776 |   | 5.98 | % |
|                                   |       | $ Arg.        |       | 3,663,919                |       | 1.75 | % | 3,663,919 |   | 1.75 | % | 2,747,941 |   | 1.75 | % | — |   |   |   |
|                                   |       | $ Col         |       | —                   |       |   |   | 28,191,911 |   | 12.45 | % | — |   |   |   | — |   |   |   |
|                                   |       | Reales             |       | 4,924,434                |       | 17.75 | % | 500,286 |   | 17.75 | % | — |   |   |   | — |   |   |   |
| Bonds payable                          |       | UF                 |       | 107,642,783              |       | 6.20 | % | 71,761,855 |   | 6.00 | % | 87,797,060 |   | 5.17 | % | 26,910,696 |   | 6.20 | % |
|                                   |       | US$                |       | 138,591,936              |       | 7.74 | % | 473,522,448 |   | 8.03 | % | 230,986,560 |   | 8.35 | % | 384,764,129 |   | 7.94 | % |
|                                   |       | $ Col         |       | 40,958,355               |       | 13.53 | % | 75,812,281 |   | 10.55 | % | 72,492,822 |   | 12.04 | % | — |   |   |   |
|                                   |       | Soles              |       | 26,384,393               |       | 4.59 | % | 8,794,797 |   | 6.93 | % | — |   |   |   | — |   |   |   |
| Notes payable                          |       | US$                |       | 43,263,524               |       | 7.17 | % | 33,159,138 |   | 7.28 | % | 20,643,338 |   | 7.42 | % | — |   |   |   |
| Miscellaneous                          |       | UF                 |       | —                   |       |   |   | — |   |   |   |   |   |   |   | 173,290 |   |   |   |
|                                   |       | Ch$                |       | 748,724                  |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | US$                |       | 15,581,693               |       | 4.14 | % | 1,859,831 |   | 6.50 | % | 5,816,246 |   | 6.50 | % | 15,200,804 |   | 6.50 | % |
| Accounts  payable to related companies |       | Ch$                |       | 52,980                   |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
| Accrued liabilities                    |       | Ch$                |       | 1,359,805                |       |   |   | 659,149 |   |   |   | 1,710,366 |   |   |   | 5,625,050 |   |   |   |
|                                   |       | US$                |       | —                   |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | $ Col         |       | 21,946,033               |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | Reales             |       | 1,199,319                |       |   |   | 1,199,319 |   |   |   | 5,320,355 |   |   |   | — |   |   |   |
| Other  long-term liabilities           |       | UF                 |       | 8,380,968                |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | Ch$                |       | 15,894,867               |       |   |   | 2,618,125 |   |   |   | 2,511,199 |   |   |   | 28,047,027 |   |   |   |
|                                   |       | Soles              |       | 28,170,634               |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | US                 |       | 2,066,781                |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   |
| Total  long-term liabilities           |       | UF                 |       | 117,783,405              |       |   |   | 72,806,744 |   |   |   | 87,797,060 |   |   |   | 27,083,986 |   |   |   |
| per  currency                          |       | Ch$                |       | 18,056,376               |       |   |   | 3,277,274 |   |   |   | 4,221,565 |   |   |   | 33,672,077 |   |   |   |
|                                   |       | US$                |       | 240,482,119              |       |   |   | 666,392,393 |   |   |   | 272,054,769 |   |   |   | 400,909,709 |   |   |   |
|                                   |       | $ Col         |       | 62,904,388               |       |   |   | 104,004,192 |   |   |   | 72,492,822 |   |   |   | — |   |   |   |
|                                   |       | Soles              |       | 54,555,027               |       |   |   | 8,794,797 |   |   |   | — |   |   |   | — |   |   |   |
|                                   |       | $ Arg         |       | 3,663,919                |       |   |   | 3,663,919 |   |   |   | 2,747,941 |   |   |   | — |   |   |   |
|                                   |       | Reales             |       | 6,123,753                |       |   |   | 1,699,605 |   |   |   | 5,320,355 |   |   |   | — |   |   |   |
| Total  long-term liabilities           |       |               |       | 503,568,987              |       |   |   | 860,638,924 |   |   |   | 444,634,512 |   |   |   | 461,665,772 |   |   |   |

 

**29.****                  ****   Sanctions:**

 

TheCompany and its directors have not been the subject of sanctions by the SVS norby any other administrative authorities.

 

F-97

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**30.****                               Subsequentevents:**

 

OnJanuary 17, 2006, the General Shareholders’ Meeting agreed to approve thebusiness combination between Edegel S.A.A. and Empresa de GeneraciónTermoeléctrica Vetanilla S.A. (Etevensa, a related entity); after thecombination, the remaining entity will be Edegel.

 

Theexchange ratio of the business combination has been determined by the Board ofDirectors and Management of Edegel and Etevensa, on the basis of valuationsperformed by investment banks, and it was established that the participation ofthe shareholders of Edegel and Etevensa in the new capital will beapproximately 87.10% and 12.90%, respectively.

 

Thebusiness combination depends on the fulfillment of the following conditions:

 

•                  No more than 4% of the shareholders ofEtevensa and no more than 2.2% of the shareholders of Edegel exercise the rightto separation. However, if under the circumstances it is advisable, thedirectors of Edegel and Etevensa can agree to carry out the combination if thepercentages of separation rights exercised are higher than those indicatedabove.

 

•                  Within five months after the project isapproved by the general shareholders’ meetings of Edegel and Etevensa, theNational Institute for the Defense of Competition and Intellectual PropertyProtection (INDECOPI) and any other relevant entity must issue a writtendeclaration stating that this business combination is not subject to administrativeauthorization, or if that is not the case, that the entity authorizes or doesnot object to the business combination.

 

•                  The companies or entities that must givetheir consent to the combination, in accordance with the obligations assumed byEdegel or Etevensa, consent to or do not oppose the business combination.

 

•                  No other significant subsequent events haveoccurred between December 31, 2005 and the date of issuance of the financialstatements.

 

F-98

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**31.****      Environment:**

 

Duringthe year ended December 31, 2003, 2004 and 2005, the Company and its domesticand foreign subsidiaries made expenditures of ThCh$ 12,897,738, ThCh$ 3,647,766and ThCh$ 1,774,838 respectively, related to environmental activitiescorresponding primarily to the following:

 

Operatingexpenses during the years ended December 31, 2003, 2004 and 2005, includedcosts of studies, monitoring, follow-up, and laboratory analysis which amountedto ThCh$ 403,312, ThCh$ 546,006 and ThCh$ 1,605,568 respectively. Environmentalprotection expenses for Endesa Costanera (including the cleaning of hydrocarbonchamber screens, measurement of gas emissions, measurement of Nox and SO2, ISO9001, 14001 and 18001) was equivalent to ThCh$ 6,208,264, ThCh$ 727,637 andThCh$ 46,638 during the years ended December 31, 2003, 2004 and 2005,respectively.

 

Dueto an update of the ISO audit 14001 and ELMA regulations in Hidroelectrica ElChocón that company expensed ThCh$ 9,372 during the year ended December 31,2005.

 

TheCompany capitalizes expenditures related to environmental activities as part ofproperty, plant and equipment when those expenditures are deemed to provideadditional future economic benefit. During the years ended December 31, 2003,2004 and 2005 capitalized environmental expenditures amounted to ThCh$6,285,779, ThCh$ 2,374,124 and ThCh$ 113,260 respectively and primarily relatedto the following activities:

 

• Central Ralco—Design andimplementation of an environment management system,

• Central Bocamina—Designand implementation of an environment management system,

• Central El Toro—Recoveringof environmental liabilities Notro 1 and Notro 2

• Tal Tal—Expenses inaccordance with the environment management system,

• Tarapacá—Repair andmodification of area of acid and leach tanks, as well as modification of waterplant’s neutralization system.

• Diego de Almagro—Constructionof spill containment basin and dangerous goods warehouse

 

F-99

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**32.****     ****Differences between Chileanand United States Generally Accepted Accounting Principles:**

 

ChileanGAAP varies in certain important respects from US GAAP. Such differencesinvolve certain methods for measuring the amounts shown in the financialstatements.

 

**I.****          Differencesin Measurement Methods**

#### ** **

Theprincipal differences between Chilean GAAP and US GAAP are described belowtogether with an explanation, where appropriate, of the method used in thedetermination of the adjustments that affect net income and total shareholders’equity. References below to “SFAS” are to Statements of Financial AccountingStandards issued by the Financial Accounting Standards Board in the UnitedStates.

 

a)    Inflation accounting

 

Thecumulative inflation rate in Chile as measured by the Consumer Price Index forthe three-years ended December 31, 2005 was approximately 7.4%. Pursuant toChilean GAAP, the Company’s financial statements recognize certain effects ofinflation. The inclusion of price-level adjustments in the accompanyingconsolidated financial statements is considered appropriate under the prolongedinflationary conditions affecting the Chilean economy even though thecumulative inflation rate for the last three years does not exceed 100%. Asallowed pursuant to Form 20-F the reconciliation included herein ofconsolidated net income, comprehensive income and shareholders’ equity, asdetermined in accordance with US GAAP, does not include adjustments toeliminate the effect of inflation accounting under Chilean GAAP.

 

b)    Reversal of revaluation of property, plantand equipment

 

Inaccordance with standards issued by the SVS, certain property, plant andequipment are recorded in the financial statements at amounts determined inaccordance with a technical appraisal. The difference between the carryingvalue and the revalued amount is included in shareholders’ equity, beginning in1989, in “Other reserves”, and is subject to adjustments for price-levelrestatement and depreciation. Revaluation of property, plant and equipment isan accounting principle not generally accepted under US GAAP, therefore, theeffects of the reversal of this revaluation, as well as of the relatedaccumulated depreciation and depreciation expense is included in paragraph (w)below.

 

c)     Deferred income taxes

 

UnderChilean GAAP, until December 31, 1999, deferred income taxes were recordedbased on non-recurring timing differences between the recognition of income andexpense items for financial statement and tax purposes. Accordingly, there wasan orientation toward the income statement focusing on differences in thetiming of recognition of revenues and expenses in pre-tax accounting income andtaxable income. At the time, Chilean GAAP also permitted not providing fordeferred income taxes where a deferred tax asset or liability was eitheroffsetting or not expected to be realized.

 

StartingJanuary 1, 2000, the Company recorded income taxes in accordance with TechnicalBulletin No. 60 and its related amendments issued by the Chilean Association ofAccountants, recognizing, using the liability method, the deferred tax effectsof temporary differences between the financial and tax values of assets andliabilities. As a transitional provision, a contra (referred to as“complementary”) asset or liability was recorded offsetting the effects of thedeferred tax assets and liabilities not recorded prior to January 1, 2000. Suchcomplementary asset or liability is being amortized to income over theestimated average reversal periods corresponding to the underlying temporarydifferences to which the deferred tax asset or liability relates.

 

F-100

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

UnderUS GAAP, companies must account for deferred taxes in accordance with SFAS 109,which requires an asset and liability approach for financial accounting andreporting of income taxes, under the following basic principles:

 

a.         A deferred tax liability or asset isrecognized for the estimated future tax effects attributable to temporarydifferences and tax loss carry forwards.

 

b.         The measurement of deferred tax liabilitiesand assets is based on the provisions of the enacted tax law. The effects offuture changes in tax laws or rates are not anticipated.

 

c.         The measurement of deferred tax assets arereduced by a valuation allowance, if based on the weight of available evidence,it is more likely than not that some portion of the deferred tax assets willnot be realized.

 

Temporarydifferences are defined as any difference between the financial reporting basisand the tax basis of an asset and liability that at some future date willreverse, thereby resulting in taxable income or expense. Temporary differencesordinarily become taxable or deductible when the related asset is recovered orthe related liability is settled. A deferred tax liability or asset representsthe amount of taxes payable or refundable in future years as a result of temporarydifferences at the end of the current year.

 

Theprincipal effect on the Company due to the difference in the accounting fordeferred income taxes between Chilean and US GAAP relates to: provisions, netoperating loss-carry forwards and accelerated depreciation methods.

 

(i.)           Provisions

(ii.)          Net operating loss-carry forwards

(iii.)         Accelerated depreciation methods

(iv.)         The reversal of the complementary assets andliabilities recorded as a transitional provision for unrecorded deferred taxesas of January 1, 2000 and their corresponding amortization into income, and

(v.)          Accounting for deferred tax differencesrelated to US GAAP adjustments.

 

Theeffect of these differences on the net income and shareholders’ equity of theCompany is included in paragraph (w) below.

 

d)    Staff severance indemnities

 

Asdescribed in Note 2 (p), under the Company’s employment contracts, it hascommitted to provide a lump sum payment to each employee at the end of theiremployment, whether due to death, termination, resignation or retirement. UntilDecember 31, 2003, under Chilean GAAP, those obligations were calculated basedon the present value of the liability determined at each year-end based on thecurrent salary and average service life of each employee. The Company, andcertain of its subsidiaries, used a real discount rate of 9.5% for the yearended December 31, 2003. Starting January 1, 2004 the Company changed itsaccounting policy for staff severance indemnities by applying actuarialvaluation of the future obligation.

 

F-101

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

UnderUS GAAP EITF 88-1 severance indemnities described above may be recorded basedon the vested benefits to which the employees are entitled if their employmentterminated immediately (settlement basis). The Company used this accountingtreatment up to December 31, 2003. Since January 1, 2004 the Company appliedaccounting for staff severance indemnities in accordance with SFAS 88“Employers’ Accounting for Settlements and Curtailments of Defined BenefitPension Plans and for Termination Benefits” allowing the actuarial method, thesame as applied under Chilean GAAP.

 

Thefollowing shows the pro-forma effects of the change in accounting principles describedabove on US GAAP net income for the year ended December 31, 2003 had theaccounting principles been applied retroactively:

 
| ** **                                                  | ** ** | **Pro-forma  (Unaudited)  2003** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|
|                                                        |       | **ThCh$**                        |       |
|                                                        |       |                             |       |
| Net income as reported for the year ended  December 31      |       | 77,237,146                       |       |
| Effect in income of the change in policy                    |       | 935,923                          |       |
| Deferred tax effect of the change in  accounting principles |       | (159,107                         | )          |
| Pro-forma net income for the year ended  December 31        |       | 78,013,962                       |       |
|                                                        |       |                             |       |
| Pro-forma earnings per share amounts                        |       | 9.51                             |       |

 

Theaccumulated effect of the accounting change for staff severance indemnities ispresented in paragraph (w) below, net of taxes of ThCh$ 256,218 and net ofminority interest of ThCh$ 0.

 

F-102

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

e)     Pension and post-retirement benefits

 

TheCompany has obligations related to complementary pension plan benefits andother post-retirement benefits as stipulated in collective bargainingagreements. Under Chilean GAAP, until December 31, 2003 post-retirementemployee benefits have been accounted for in accordance with the respectiveemployee collective bargaining agreement, based on the actuarially determinedprojected benefit obligation using a discount rate of 9.5%. Under US GAAP, post-retirementemployee benefits have been accounted for in accordance with SFAS 87“Employers’ Accounting for Pensions” and SFAS 106 “Employers’ Accounting forPostretirement Benefits Other Than Pensions.” Until December 31, 2003 the primary difference between Chilean GAAP andUS GAAP resulted from using a discount rate for US GAAP based on high-qualityfixed-income investments currently available and expected to be availableduring the period to maturity of the benefits obligations, which was 6.0% for theyears ended December 31, 2002 and 2003, versus, as applied under Chilean GAAP,using a discount rate based on the Company’s cost to borrow. In the years endedDecember 31, 2004 and 2005 the Company used the same methodology for bothChilean GAAP and US GAAP to estimate the applicable interest rate and thusthere is no difference in the amount of pension and post-retirement liabilityas of December 31, 2004. The effects on the short-term and long-term liabilityof accounting for post-retirement benefits under US GAAP in prior years havebeen presented in paragraph (w) below.

 

f)     Investments in related companies

 

UnderChilean GAAP, until December 31, 2003 for all investments accounted for by theequity method, the proportionate net book value of the investee company wasrecorded as an investment and the difference between the cost of investment andthe proportionate net book value of the investee was recorded as goodwill.Generally, goodwill is amortized into income over a maximum period of twentyyears. The investment account is adjusted to recognize the investor’s share ofthe earnings or losses of the investee determined under Chilean GAAP subsequentto the date of the purchase. Technical Bulletin No. 72 issued by ChileanAssociation of Accountants requires goodwill to be determined based on theallocation of the acquisition price based on the fair values of acquired assetsand liabilities for the accounting for all acquisitions after January 1, 2004.

 

UnderUS GAAP, in accordance with Accounting Principles Board Opinion No. 18, “theEquity Method for accounting for Investment in Common Stock” (“APB No. 18”),the carrying amount of an investment accounted for under the equity method isinitially recorded at cost and shown as a single amount in the balance sheet ofthe investor. It is adjusted to recognize the investor’s share of the earningsor losses of the investee determined under US GAAP subsequent to the date ofinvestment. The investment reflects adjustments similar to those made inpreparing consolidated financial statements, including adjustments to eliminateinter-company gains and losses and to account for the differences, if any,between the investor’s cost and the underlying equity in net assets of theinvestee at the date of investment. The investment is also adjusted to reflectthe investor’s share of change in the investee capital accounts.

 

TheCompany’s equity share of the effect of the adjustments from Chilean GAAP to USGAAP of equity accounted investees is included in paragraph (w) below. Theprincipal US GAAP adjustments affecting the Company’s equity investees are asfollows:

 

(i)            Adjustment related to capitalized foreigncurrency exchange differences (see paragraph i).

(ii)           The recording of deferred taxes in accordancewith SFAS 109 (see paragraph c).

(iii)          The recording of derivative instruments inaccordance with SFAS 133 (see paragraph p).

(iv)          Adjustment related to pensions and otherpost-retirement benefits (see paragraph e).

(v)           Adjustment related to capitalized general andadministration expenses (see paragraph l).

(vi)          Adjustment related to negative goodwill (seeparagraph h).

(vii)         Adjustment related to capitalized interests.

(viii)        Adjustment related to regulated assets

(ix)          The deferred income tax effects ofadjustments (i) to (vii).

 

F-103

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

g)     Goodwill

 

(i)        Under Chilean GAAP, for acquisitions occurreduntil December 31, 2003 assets acquired and liabilities assumed were recordedat their carrying value and the excess of the purchase price over the carryingvalue is recorded as goodwill. Circular No. 1358, dated December 3, 1997 issuedby the SVS, extended the maximum amortization period of goodwill to 20 yearsfrom the previous 10 years.

 

UnderUS GAAP, assets acquired and liabilities assumed are recorded at theirestimated fair values, and the excess of the purchase price over the estimatedfair value of the net identifiable assets and liabilities acquired are recordedas goodwill. Prior to January 1, 2002 under US GAAP, the Company amortizedgoodwill on a straight-line basis over the estimated useful lives of theassets, ranging from 20 to 40 years.

 

TechnicalBulletin No. 72 issued by Chilean Association of Accountants requires using fairvalue of acquired assets and liabilities for the accounting for allacquisitions after January 1, 2004, and consequently after that date differencein accounting treatment related to the recognition of assets acquired andliabilities assumed between Chilean GAAP and US GAAP no longer exists.

 

(ii)       Under Chilean GAAP, the Company evaluates thecarrying amount of goodwill for impairment. The Company determines theimpairment losses using a discounted cash flow approach and recent comparabletransactions in the market. In order to estimate recoverable value, the Companymakes assumptions about future events that are highly uncertain at the time ofestimation. The results of this analysis showed no impairment of goodwill forthe years ended December 31, 2004 and 2005.

 

Thefollowing effects are included in the net income and shareholders’ equityreconciliation to US GAAP under paragraph (w) below:

 

(i)            differences in the amount of the impairmentunder US GAAP related to basis differences in the original determination andsubsequent amortization methodology between Chilean GAAP and US GAAP;

(ii)           the reversal of negative goodwill impairmentunder Chilean GAAP, as under US GAAP negative goodwill is treated as anadjustment to the net book value of the related fixed assets to their fairvalue;

(iii)          the reversal of goodwill amortizationrecorded under Chilean GAAP.

 

F-104

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

Asummary of the changes in the Company’s goodwill under US GAAP during the yearsendedDecember 31, 2003 and 2004, by country of operation is as follows:

 
| ** ** | ** ** | **Goodwill under US GAAP** | ** ** |
|------------|------------|-------------------------------------------|------------|
| ** ** | ** ** | **January 1, 2004**             | ** ** | **Acquisitions** | ** ** | **Cumulative  Translation  Adjustment** | ** ** | **Impairment** | ** ** | **December 31, 2004** | ** ** |
| ** ** | ** ** | **ThCh$**                                 | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| ** ** | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Chile      |       | 5,183,917                                 |       | — |   | — |   | — |   | 5,183,917 |   |
| Peru       |       | 18,663,948                                |       | — |   | (1,571,415 | ) | — |   | 17,092,533 |   |
| Colombia   |       | 25,405,455                                |       | — |   | (2,139,143 | ) | — |   | 23,266,312 |   |
| Total      |       | 49,253,320                                |       | — |   | (3,710,558 | ) | — |   | 45,542,762 |   |

 
| ** ** | ** ** | **Goodwill under US GAAP** | ** ** |
|------------|------------|-------------------------------------------|------------|
| ** ** | ** ** | **January 1, 2005**             | ** ** | **Acquisitions** | ** ** | **Cumulative  Translation  Adjustment** | ** ** | **Impairment** | ** ** | **December 31, 2005** | ** ** |
| ** ** | ** ** | **ThCh$**                                 | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| ** ** | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Chile      |       | 5,183,917                                 |       | — |   | — |   | — |   | 5,183,917 | ** ** |
| Peru       |       | 17,092,533                                |       | — |   | (1,922,546 | ) | — |   | 15,169,987 | ** ** |
| Colombia   |       | 23,266,312                                |       | — |   | (2,617,518 | ) | — |   | 20,648,794 | ** ** |
| Total      |       | 45,542,762                                |       | — |   | (4,540,064 | ) | — |   | 41,002,698 | ** ** |

 

h)    Negative goodwill

 

UnderChilean GAAP, until December 31, 2004 the excess of the carrying value of theassets assumed in a business combination over the purchase price was recordedas negative goodwill. Circular No. 1358, dated December 3, 1997 issued by theSVS, extended the maximum amortization period of negative goodwill to 20 yearsfrom the previous 5 years. Technical Bulletin No. 72 issued by ChileanAssociation of Accountants requires using fair value of acquired assets andliabilities for the accounting for all acquisitions after January 1, 2004.

 

UnderUS GAAP, the fair values of the assets acquired less the fair values of theliabilities assumed in excess of the purchase price are allocatedproportionately to reduce the values assigned to non-current assets. If theallocation reduces the non-current assets to zero, the remainder of the excessis recorded as an extraordinary gain to income.

 

F-105

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

Adjustmentsrelated to negative goodwill necessary to make the consolidated financialstatements conform to US GAAP are included in paragraph (w) below and are asfollows:

 

h-1:       The reversal of negative goodwillamortization and write-offs described in paragraph (g) above, which did notmeet the US GAAP impairment criteria for long-lived assets under SFAS 144 andthe reversal of negative goodwill amortization recorded under Chilean GAAP;

h-2:       The effects of reducing depreciation expense,due to the proportionate allocation of the excess purchase price to property,plant and equipment.

 

i)      Capitalized exchange differences

 

Inaccordance with Chilean GAAP, the Company has capitalized both interest on debtdirectly related to property, plant and equipment under construction as well asfinance costs corresponding to exchange differences generated by the loansassociated with such assets. The capitalization of interest costs associatedwith projects under construction is optional when incurred on debt that is notdirectly related to such projects.

 

UnderUS GAAP, the capitalization of interest on qualifying assets under constructionis required, regardless of whether interest is associated with debt directlyrelated to a project. In addition, under US GAAP, foreign translation exchangedifferences may not be capitalized. The adjustment to reverse out the foreigncurrency translation adjustments relating to the loans financing theconstructions in progress is shown in paragraph (w) below as follows:

 

i-1:          Adjustment to net income related to foreignexchange differences;

i-2:          Adjustment to depreciation of property, plantand equipment.

 

j)     Accumulated deficit during the developmentstage

 

UnderChilean GAAP, the net losses incurred during the development stage ofsubsidiary companies are recorded directly in the parent company’s equity.Under US GAAP, such results of operations of all controlled subsidiaries mustbe included in the consolidated statement of income. As of December 31, 2004and 2005, respectively, no company was classified as development stage company.For the year ended December 31, 2003, the effects of the adjustment areincluded in paragraph (w) below.

 

k)    Minimum dividend

 

Asrequired by the Chilean Companies Act, unless otherwise decided by theunanimous vote of the holders of issued and subscribed shares, the Company mustdistribute a cash dividend in an amount equal to at least 30% of its net incomefor each year as determined in accordance with Chilean GAAP, unless and exceptto the extent the Company has unabsorbed prior year losses. Net income relatedto the amortization of negative goodwill can only be distributed as anadditional dividend by the approval of the shareholders, and accordingly, isnot included in the calculation of the minimum dividend to be distributed.Since the payment of the 30% dividend out of each year’s income is required byChilean law, an accrual has been made in the reconciliation in paragraph (w)below to reflect the unrecorded dividend liability, whenever and to the extentthe recorded interim dividends do not reach the 30% minimum dividend.

 

F-106

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

l)      Capitalized general and administrativeexpenses

 

Until1993 under Chilean GAAP, Endesa-Chile capitalized a portion of itsadministrative and selling expenses as part of the cost ofconstructions-in-progress because a substantial portion of the efforts ofmanagement were involved in the administration of major projects. Under USGAAP, general and administrative expenses are charged to expense unless theycan be directly identified with the supervision of the constructions of specificprojects. Under Chilean GAAP the Company has also capitalized otheradministrative expenses into other long-term assets, which under US GAAP wouldnot be allowed.

 

Theeffects of eliminating capitalized general and administrative expenses are detailedin paragraph (w) below as follows:

 
| l-1: |   | The  elimination of the capitalized administrative and selling expenses from  property, plant and equipment and the effect on depreciation expense for the  year; |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| l-2: |   | The  elimination of the capitalized administrative and selling expenses from other  assets and the effect on income for the year.                                 |

 

m)   Involuntary employee termination benefits

 

UnderChilean GAAP, the Argentine subsidiaries, Endesa Costanera S.A. andHidroelectricidad, recorded an accrual of certain involuntary employeestermination benefits related to the restructuring plan announced in 1997. Sincethat date employees have continued to be made redundant pursuant to this plan.Additionally, during 2003 the Company increased the amount of the accrual recordedunder Chilean GAAP. In accordance with US GAAP, in order to recognize aliability at the balance sheet date for the cost to terminate employeesinvoluntarily, there must have been a plan that specifically includesnotification of such employees prior to the balance sheet date. As of December31, 2003, 2004 and 2005, respectively, this requirement had not been met. Theeffect of eliminating the accrued liability recognized is presented inparagraph (w) below.

 

n)    Creation of Endesa Brasil

 

Asof September 30, 2005 the Brazilian investments of Endesa S.A. (Spain), theultimate parent company of Endesa-Chile, were reorganized. As a result of thisreorganization of entities under common control, a new entity, Endesa BrazilS.A., was created and the total participation of Endesa-Chile held in itssubsidiary Centrais Electricas Cachoeira Dourada S.A. (CDSA) and in its equitymethod investee Companhia de Interconexao Energetica S.A. (CIEN) wastransferred to this entity in exchange for 38.75% participation in the newlyformed company. As of September 30, 2005, the Company deconsolidated CDSA,stopped accounting for CIEN under the equity method and began to account forits participation in Endesa Brasil S.A. under the equity. The differencebetween net assets contributed and received generated a difference presented asreserve in equity. Although the transaction received the same accountingtreatment under both, Chilean GAAP and US GAAP, as a result of the existingadjustments to US GAAP in the subsidiaries, which were the subject of thereorganization, an adjustment to equity of Endesa-Chile was recorded. For theyear ended December 31, 2005 the effects of the adjustment are included inparagraph (w) below.

 

F-107

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

o)    Translation of financial statements ofinvestments outside of Chile

 

UnderChilean GAAP, in accordance with Technical Bulletin 64 (“BT 64”) the financialstatements of foreign subsidiaries that operate in countries exposed tosignificant risks (“unstable” countries), and that are not considered to be anextension of the parent company’s operations, are re-measured into US dollars.The Company’s foreign subsidiaries in Argentina, Peru, Brazil, and Colombia allmeet the criteria of foreign subsidiaries that operate in countries exposed tosignificant risks under BT 64, and are re-measured into US dollars. The Companyhas re-measured its foreign subsidiaries into US dollars under this requirementas follows:

 

•  Monetary assets and liabilities aretranslated at year-end rates of exchange between the US dollar and the localcurrency;

•  All non-monetary assets andliabilities and shareholder’s equity are translated at historical rates ofexchange between the US dollar and the local currency;

•  Income and expense accounts aretranslated at average rates of exchange between the US dollar and localcurrency;

•  The effects of any exchange ratefluctuations between the local currency and the US dollar are included in theresults of operations for the period.

 

UnderBT 64, the investment in the foreign subsidiary is price-level restated, theeffects of which are reflected in income, while the effects of the foreignexchange gains or losses between the Chilean Peso and the US Dollar on theforeign investment measured in US dollars, are reflected in equity in theaccount “Cumulative Translation Adjustment” which amounted to net losses ofThCh$ 20,240,225, ThCh$ 7,967,740 and ThCh$ 11,042,643 for the years endedDecember 31, 2003, 2004 and 2005, respectively.

 

Inthe opinion of the Company, the foreign currency translation proceduresdescribed above are part of the comprehensive basis of preparation ofprice-level adjusted financial statements required by Chilean GAAP. Inclusionof inflation and translation effects in the financial statements is consideredappropriate under the inflationary conditions that have historically affectedthe Chilean economy, and accordingly, are not eliminated in the reconciliationto US GAAP as permitted by Form 20-F.

 

p)    Derivative instruments

 

TheCompany engages in derivative activity for hedging purposes. These derivativesare considered accounting hedges under Chilean GAAP. Under Chilean GAAP theaccounting treatment of hedging activity is similar to the accounting treatmentof fair value hedges and cash flow hedges under SFAS 133. The documentation andhedge effectiveness requirements under Chilean GAAP though are not asburdensome as under SFAS 133.

 

UnderUS GAAP, if the derivative is designated as a fair value hedge, changes in fairvalue of the derivative and of the hedged item attributable to the hedged riskare recognized directly in earnings. If the derivative is designated as a cashflow hedge, the effective portion of changes in the fair value of thederivative are recorded in Other Comprehensive Income (“OCI”) and arereclassified into earnings in the same period during which the hedged itemaffects earnings. Ineffectiveness, if any, is reflected directly in earnings.Finally, the gain or loss on a hedging derivative instrument that is designatedas, and is effective as, an economic hedge of the net investment in a foreignoperation shall be reported in the same manner as a translation adjustment tothe extent it is effective as a hedge. The ineffective portion of netinvestment hedges shall be reported in earnings. If the derivative is notdesignated as a hedge, or if it does not meet the requirements for hedgeaccounting under SFAS 133, changes in fair value of the derivative instrumentare recorded directly in earnings.

 

F-108

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

Asof December 31, 2004 the Company did not apply hedge accounting to theirderivative instruments under US GAAP. Therefore, all derivative instrumentshave been accounted at fair value with changes in fair value recognizeddirectly in earnings. As of December 31, 2005 the Company applied hedgeaccounting to a portfolio of derivative instruments executed during this year.These instruments were designated as cash flow hedges of variableinterest-bearing liabilities with changes in fair value recorded in OCI, Theremainder of derivative instruments were accounted at fair value with changesin fair value recognized directly in earnings

 

TheCompany has designated under Chilean GAAP certain non-derivative financialinstruments as hedges of the foreign currency exposure of net investments inforeign operations. The gain or loss on the non-derivative financial instrumentthat is designated as a hedge is reported as a translation adjustment to theextent it is effective as a hedge, any ineffectiveness is recorded in earnings.This accounting treatment is consistent with SFAS 133.

 

Theeffects of the adjustment with respect to financial derivatives, commodityderivatives, and embedded derivatives for the years ended December 31, 2003,2004 and 2005 are included in the net income and shareholders’ equityreconciliation to US GAAP under paragraph (w) below.

 

q)    Reorganization of subsidiaries

 

Thisadjustment corresponds to the reorganization of the Company’s subsidiariesEndesa Costanera S.A. and Central Buenos Aires (CBA) during 2001, in whichEndesa Costanera acquired the minority interest in CBA from third parties andexchanged shares with Endesa Argentina S.A. Under Chilean GAAP, the Companyrecorded the transactions under the pooling method, using the book values ofthe net assets acquired under merger accounting.

 

UnderUS GAAP the exchange of shares between entities under common control isrecorded at book values. However, to the extent that shares in CBA wereacquired from third parties, the identifiable assets acquired and liabilitiesassumed are recorded at fair value using purchase accounting together with theshares issued by the subsidiary Endesa Costanera S.A. The difference inproperty, plant and equipment basis between Chilean GAAP and US GAAP results ina greater depreciation expense to be recorded under US GAAP over the remainingestimated useful life of 20 years. The effect of this adjustment is included inthe net income and shareholders’ equity reconciliation to US GAAP underparagraph (w) below.

 

r)     Assets held for sale and accounting for theimpairment or disposal of long-lived assets

 

UnderChilean GAAP the Company records divestitures of investments or assets in theyear in which they occur. Under US GAAP, in accordance with SFAS 144,long-lived assets for which there is a plan to sell the assets within thefollowing year, shall be disclosed separately from the Company’s other assets,provided all criteria set in SFAS 144 are met. Additionally, long-lived assetsclassified as held for sale must be measured at the lower of their carryingamount or fair value less cost to sell. Long-lived assets shall not be depreciatedwhile they are classified as held for sale, while interest and other expensesattributable to the liabilities of a disposal group classified as held for saleshall continue to be accrued.

 

TheCompany’s Board of Directors approved a plan to sell a number of the Company’sassets during October 2002. The following assets to be sold met the definitionof segments, reporting units or long-lived assets held for sale:

 

•      Central Canutillar power plant

•      Gas Atacama transmission lines

•      CELTA transmission lines

•      Infrastructura Dos Mil S.A.

 

F-109

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

TheCompany evaluated the carrying values of all assets held for sale, recording aloss to the extent that the assets’ fair value less cost to sell was lower thanthe carrying value of the assets. Additionally, the Company ceased recordingdepreciation expense once the assets met the qualification criteria of held forsale, which varied from October to December 2002. The effect of theseadjustments is included in the net income and shareholders’ equityreconciliation to US GAAP under paragraph (w) below.

 

Inaccordance with SFAS 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” the Company evaluates the carrying amount of property,plant and equipment and other long-lived assets, in relation to the operatingperformance and future undiscounted cash flows of the underlying business. Asrequired by this standard an impairment loss is recognized in the event thatfacts and circumstances indicate that the carrying amount of an asset may notbe fully recoverable, when compared to the estimated future undiscounted cashflows. Impairment is recorded based on estimates of future discounted cashflows, as compared to current carrying amounts. For the years ended December31, 2003, 2004, and 2005 no additional amounts were recorded for impairmentunder US GAAP.

 

s)     Elimination of discontinued operations

 

UnderChilean GAAP, no restatement to the financial statement information presentedin previous years is required after a divestiture has occurred. Under US GAAP,in accordance with SFAS 144, the discontinued operations of a component must beretroactively separated from the continuing operations of an entity, when theoperations and cash flows of a component will be eliminated from the ongoingoperations of an entity as a result of a disposal or a sale transaction, andthe entity will not have any significant continuing involvement in theoperations of the component after the disposal transaction.

 

TheCompany evaluated whether any of the assets held for sale met either criteria,noting that the transmission lines and power plant are not components, as theyare included as a part of larger cash flow generating groups, and theoperations of these assets cannot be separated from their respective groups.Additionally, Endesa-Chile planned to continue generating revenues fromCanutillar plant through a purchase power agreement, management agreement, anda transmission leasing arrangement with the future buyer. Infrastructura DosMil S.A. met the conditions for discontinued operations because it had distinctand separable financial results from operations and cash flows. As a result ofthe disposal, the results of operations of the reporting unit have beeneliminated from the ongoing operations of Endesa-Chile, as Endesa-Chile havenot any continuing involvement in the operations of Infrastructura Dos Mil S.A.after it was sold. The effect of restating discontinued operations is includedin the net income reconciliation to US GAAP, net of tax expenses of ThCh$103,578 for the year ended December 31, 2003, respectively, and net of minorityinterest of ThCh$ 0 for the year ended December 31, 2003, under paragraph (w)below.

 

t)      Accounting for asset retirement obligations

 

InJune 2001 the FASB issued Statement of Financial Accounting Standard No. 143“Accounting for Asset Retirement Obligations” (“SFAS 143”), which addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts. The Company adopted SFAS 143 effective January 1, 2003. This standardrequires the Company to record the fair value of the legal obligation it has tomake certain environmental restorations upon closure of its facilities. Thefair value of the liability is estimated by discounting the future estimatedexpenditures related to the restoration. The Company then measures changes inthe liability due to passage of time by applying an interest method ofallocation to the amount of the liability at the beginning of the period. Theinterest rate used to measure that change is the credit-adjusted risk-free ratethat existed when the liability, or portion thereof, was initially measured.That amount is recognized as an increase in the carrying amount of theliability and the expense is classified as an operating item in the statementof income, referred to as accretion expense. At the same time the standardrequires

 

F-110

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

theCompany to capitalize the new costs arising as the result of additionalliabilities incurred, such as the activation of a new generation facility, andsubsequently allocate that asset retirement cost to expense over the life ofthe plant based on the useful life of the plant. The cumulative effect ofadopting SFAS 143 as of January 1, 2003 is presented in paragraph (w) below,net of taxes of ThCh$ 136,379 and minority interest of ThCh$ 123,596.

 

Theadoption of FIN 47 did not lead to a change of the amounts previouslydetermined in accordance with FSAS 143 as the Company had considered all legalobligations under SFAS 143 already.

 

Theeffects on US GAAP income and Shareholders equity are shown in paragraph (w)below as follows:

 

t-1:          The effects of amortizing the deferred costsof the asset retirement obligation are reflected as depreciation expense;

t-2:          The effects of re-measuring the liability dueto the passage of time are reflected as accretion expense.

 

Thefollowing table shows reconciliation of the liability for the years endedDecember 31, 2004 and 2005 as recorded by the Company:

 
| ** **                         | ** ** | **2004**  | ** ** | **2005**  | ** ** |
|------------------------------------|------------|-----------|------------|-----------|------------|
| ** **                         | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                               |       |      |       |      |       |
| Balance as of January 1            |       | 469,490   |       | 1,101,840 |       |
| Cumulative translation adjustment  |       | (39,530   | )          | (52,966   | )          |
| Liabilities incurred in the period |       | 631,034   |       | —    |       |
| Accretion expense                  |       | 40,846    |       | (111,410  | )          |
| Balance as of December 31          |       | 1,101,840 |       | 937,464   |       |

 

u)    Effects of minority interest on the US GAAPadjustments

 

TheCompany calculated effects of the participation of the non-controllingshareholders, referred to as minority interest, related to the US GAAPadjustments in the subsidiaries in which it is not the sole shareholder.

 

v)    Accounting for the Impairment or Disposal ofLong-Lived Assets

 

Inaccordance with SFAS 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” the Company evaluates the carrying amount of property,plant and equipment and other long-lived assets, in relation to the operatingperformance and future undiscounted cash flows of the underlying business. Thisstandard requires that an impairment loss be recognized in the event that factsand circumstances indicate that the carrying amount of an asset may not befully recoverable, when compared to the estimated future undiscounted cashflows. Impairment is recorded based on estimates of future discounted cashflows, as compared to carrying amounts. For the years ended December 31, 2003,2004, and 2005 no additional amounts were recorded for impairment under USGAAP.

 

F-111

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

w)    Effects of conforming to US GAAP:

 

Thereconciliation of reported net income required to conform to US GAAP is asfollows:

 
| ** **                                                                                                                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                      | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                                                                      | ** ** | **ThCh$**                                   | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                                                                                                            |       |                                        |       |   |   |   |   |
| **Net income in accordance with Chilean GAAP**                                                                                  |       | 82,967,216                                  |       | 86,805,151 |   | 110,622,993 |   |
| Reversal of revaluation of Property, plant  and equipment (paragraph b)                                                         |       | 803,465                                     |       | 1,048,078 |   | 363,486 |   |
| Deferred income taxes (paragraph c)                                                                                             |       | 54,951,662                                  |       | (60,964,425 | ) | (7,788,983 | ) |
| Staff severance indemnities (paragraph d)                                                                                       |       | 122,287                                     |       | 990,436 |   | — |   |
| Pension and post-retirement benefits  (paragraph e)                                                                             |       | (1,273,905                                  | )          | 739,188 |   | — |   |
| Investments in related companies (paragraph  f)                                                                                 |       | 29,545,891                                  |       | 1,517 |   | (28,565,759 | ) |
| Goodwill (paragraph g)                                                                                                          |       | 1,718,354                                   |       | 1,516,193 |   | 1,366,376 |   |
| Negative goodwill (paragraph h):                                                                                                |       |                                        |       |   |   |   |   |
| h-1: Amortization of negative goodwill                                                                                          |       | (16,554,544                                 | )          | (16,681,231 | ) | (15,310,429 | ) |
| h-2: Depreciation of Property, plant and  equipment                                                                             |       | 2,588,668                                   |       | 14,224,897 |   | 10,356,632 |   |
| Capitalized exchange differences (paragraph  i):                                                                                |       |                                        |       |   |   |   |   |
| i-1: Foreign exchange differences                                                                                               |       | 31,081,813                                  |       | (6,055,011 | ) | — |   |
| i-2: Depreciation of Property, plant and  equipment                                                                             |       | 73,577                                      |       | 256,046 |   | 483,447 |   |
| Accumulated deficit during the development  stage (paragraph j)                                                                 |       | 80,542                                      |       | — |   | — |   |
| Capitalized general and administrative  expenses (paragraph l):                                                                 |       |                                        |       |   |   |   |   |
| l-1: Depreciation of Property, plant and  equipment                                                                             |       | (439,686                                    | )          | 1,916,148 |   | 491,487 |   |
| l-2: Other operating results                                                                                                    |       | (1,951,866                                  | )          | 976,229 |   | 947,160 |   |
| Involuntary employee termination benefits  (paragraph m)                                                                        |       | 12,611                                      |       | (1,733 | ) | (17,023 | ) |
| Derivative instruments (paragraph p)                                                                                            |       |                                        |       |   |   |   |   |
| Operating                                                                                                                       |       | (181,840,348                                | )          | (12,872,432 | ) | 27,100,647 |   |
| Non-operating                                                                                                                   |       | 9,340,572                                   |       | 2,399,000 |   | 673,574 |   |
| Reorganization of subsidiaries (paragraph  q)                                                                                   |       | (280,599                                    | )          | (256,973 | ) | (228,064 | ) |
| Assets held for sale (paragraph r)                                                                                              |       | 951,583                                     |       | — |   | — |   |
| Elimination of discontinued operations  (paragraph s)                                                                           |       | (524,168                                    | )          | — |   | — |   |
| Accounting for asset retirement obligations  (paragraph t)                                                                      |       |                                        |       |   |   |   |   |
| t-1: Depreciation expense                                                                                                       |       | (329                                        | )          | (300 | ) | (38,386 | ) |
| t-2: Accretion expense                                                                                                          |       | (40,732                                     | )          | (109,868 | ) | 111,410 |   |
| Effects of minority interest on the US GAAP  adjustments (paragraph u)                                                          |       | 65,911,282                                  |       | 51,899,567 |   | (292,543 | ) |
| **Income from continuing operations in  accordance with US GAAP before cumulative effect of changes in accounting  principles** |       | 77,243,346                                  |       | 65,830,477 |   | 100,276,025 |   |
| Cumulative effect of changes in accounting  principles, net of taxes and minority interest (paragraph d and t)                  |       | (128,547                                    | )          | 1,250,948 |   | — |   |
|                                                                                                                            |       |                                        |       |   |   |   |   |
| **Income from continuing operations in  accordance with US GAAP**                                                               |       | 77,114,799                                  |       | 67,081,425 |   | 100,276,025 |   |
| Income from discontinued operations, net of  taxes and minority interest (paragraph s)                                          |       | 122,347                                     |       | — |   | — |   |
| **Net income in accordance with US GAAP**                                                                                       |       | 77,237,146                                  |       | 67,081,425 |   | 100,276,025 |   |
| **Other comprehensive income (loss):**                                                                                          |       |                                        |       |   |   |   |   |
| (Loss) on hedge of the foreign currency  exposure of net investment in foreign operations, net of income tax of ThCh$ 0    |       | (12,125,841                                 | )          | (18,981,215 | ) | (15,132,065 | ) |
| Fair value change of hedging instruments  used in cash flow hedges (paragraph p), net of tax                                    |       | —                                      |       | — |   | (134,855 | ) |
| Cumulative translation adjustment, net of  income tax of ThCh$ 0                                                           |       | 22,212,818                                  |       | 10,301,859 |   | 14,258,974 |   |
| **Comprehensive income in accordance with US  GAAP**                                                                            |       | 87,324,123                                  |       | 58,402,069 |   | 99,268,079 |   |

 

F-112

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

(w)  The reconciliation to conform shareholders’equity amounts to US GAAP is as follows:

 
| ** **                                                               | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                               | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                                                               | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** |
|                                                                     |       |                                  |       |   |   |
| **Shareholders’ equity in accordance with  Chilean GAAP**           |       | 1,625,378,308                         |       | 1,642,258,829 |   |
| Reversal of revaluation of Property, plant  and equipment (paragraph b): |       |                                  |       |   |   |
| Property, plant and equipment                                            |       | (11,667,224                           | )          | (11,667,224 | ) |
| Accumulated depreciation                                                 |       | 6,379,797                             |       | 6,743,283 |   |
| Deferred income taxes (paragraph c)                                      |       | (109,933,350                          | )          | (93,163,735 | ) |
| Investments in related companies (paragraph  f)                          |       | 30,503,273                            |       | (20,074,774 | ) |
| Goodwill (paragraph g):                                                  |       |                                  |       |   |   |
| Goodwill                                                                 |       | 20,674,129                            |       | 18,590,641 |   |
| Accumulated amortization                                                 |       | 4,553,722                             |       | 5,385,464 |   |
| Negative goodwill (paragraph h):                                         |       |                                  |       |   |   |
| h-1: Negative goodwill                                                   |       | 366,268,198                           |       | 359,748,222 |   |
| h-1 Accumulated amortization of negative  goodwill                       |       | (308,314,116                          | )          | (323,624,545 | ) |
| h-2: Property, plant and equipment                                       |       | (537,779,581                          | )          | (511,964,149 | ) |
| h-2: Accumulated depreciation of Property,  plant and equipment          |       | 142,028,544                           |       | 191,624,523 |   |
| Capitalized exchange differences (paragraph  i):                         |       |                                  |       |   |   |
| Property, plant and equipment                                            |       | (21,292,048                           | )          | (20,533,976 | ) |
| Accumulated depreciation of Property, plant  and equipment               |       | 727,726                               |       | 1,142,946 |   |
| Minimum dividend (paragraph k)                                           |       | (21,037,177                           | )          | (28,593,769 | ) |
| Capitalized general and administrative  expenses (paragraph l):          |       |                                  |       |   |   |
| l-1: Property, plant and equipment                                       |       | (29,589,181                           | )          | (29,516,996 | ) |
| l-1: Accumulated depreciation of Property,  plant and equipment          |       | 7,487,871                             |       | 9,153,366 |   |
| l-2: Other assets                                                        |       | (1,908,526                            | )          | (1,202,325 | ) |
| Involuntary employee termination benefits  (paragraph m)                 |       | 84,310                                |       | 57,912 |   |
| Derivative instruments (paragraph p)                                     |       | (21,177,611                           | )          | 7,418,110 |   |
| Reorganization of subsidiaries (paragraph  q)                            |       | 4,363,914                             |       | 3,644,900 |   |
| Accounting for asset retirement  obligations, net (paragraph t)          |       | (529,920                              | )          | (405,045 | ) |
| Effects of minority interest on the US GAAP  adjustments (paragraph u)   |       | 90,570,201                            |       | 77,211,907 |   |
| **Shareholders’ equity in accordance with US  GAAP**                |       | 1,235,791,259                         |       | 1,282,233,565 |   |

 

F-113

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

(w)  The changes in shareholders’ equity in USGAAP as of each year-end are as follows:

 
| ** **                                                                                     | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                     | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                                     | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                                                                           |       |                                  |       |   |   |   |   |
| **Shareholders’ equity in accordance with US  GAAP—January 1,**                      |       | 1,130,645,383                         |       | 1,192,944,248 |   | 1,235,791,259 |   |
|                                                                                           |       |                                  |       |   |   |   |   |
| Dividends paid during the year                                                                 |       | —                                |       | (19,543,139 | ) | (33,873,246 | ) |
| Reversal of dividends payable as of  previous balance sheet date                               |       | —                                |       | 25,025,258 |   | 21,037,177 |   |
| Minimum dividend (paragraph k)                                                                 |       | (25,025,258                           | )          | (21,037,177 | ) | (28,593,769 | ) |
| Cumulative translation adjustment                                                              |       | 22,212,818                            |       | 10,301,859 |   | 14,258,974 |   |
| Reorganization under common control Endesa  Brazil (paragraph n)                               |       | —                                |       | — |   | (11,395,935 | ) |
| Gain (loss) on hedge of the foreign  currency exposure of net investment in foreign operations |       | (12,125,841                           | )          | (18,981,215 | ) | (15,132,065 | ) |
| Fair value change of hedging instruments  used in cash flow hedges                             |       | —                                |       | — |   | (134,855 | ) |
| Net income in accordance with US GAAP for  the year                                            |       | 77,237,146                            |       | 67,081,425 |   | 100,276,025 |   |
| **Shareholders’ equity in accordance with US  GAAP—December 31,**                    |       | 1,192,944,248                         |       | 1,235,791,259 |   | 1,282,233,565 |   |

 

F-114

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**II.****       ****Additional DisclosureRequirements:**

 

**a)****  ****Basic and diluted earnings per share:**

 
| ** **                                                                                                                                       | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                       | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                                                                                       | ** ** | **Ch$**                                    | ** ** | **Ch$** | ** ** | **Ch$** | ** ** |
|                                                                                                                                             |       |                                       |       |   |   |   |   |
| Chilean GAAP earnings per share                                                                                                                  |       | 10.12                                      |       | 10.58 |   | 13.49 |   |
| US GAAP (loss) earnings per share:                                                                                                               |       |                                       |       |   |   |   |   |
| US GAAP earnings per share from continuing  operations before cumulative effect of changes in accounting principles and  discontinued operations |       | 9.53                                       |       | 8.03 |   | 12.23 |   |
| Cumulative effect of changes in accounting  principles                                                                                           |       | (0.02                                      | )          | 0.15 |   | — |   |
| US GAAP earnings per share before  discontinued operations                                                                                       |       | 9.51                                       |       | 8.18 |   | 12.23 |   |
|                                                                                                                                             |       |                                       |       |   |   |   |   |
| US GAAP earnings per share from  discontinued operations                                                                                         |       | 0.02                                       |       | — |   | — |   |
|                                                                                                                                             |       |                                       |       |   |   |   |   |
| US GAAP earnings per share                                                                                                                       |       | 9.53                                       |       | 8.18 |   | 12.23 |   |
|                                                                                                                                             |       |                                       |       |   |   |   |   |
| Weighted average number of common shares  outstanding (000’s)                                                                               |       | 8,201,755                                  |       | 8,201,755 |   | 8,201,755 |   |

 

Thereare no requirements to provide earnings per share disclosures under ChileanGAAP. The earnings per share figures disclosed above for both US GAAP andChilean GAAP purposes have been calculated by dividing the respective earnings(loss) amounts in accordance with US GAAP and Chilean GAAP, respectively, bythe weighted average number of common shares outstanding during the year. TheCompany has not issued convertible debt or equity securities nor does it haveother common stock equivalent securities outstanding. Consequently, there areno potentially dilutive effects on the earnings per share of the Company.

 

F-115

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**b)****   ****Income taxes:**

 

The(provision) benefit for income taxes (charged)/credited to the results ofoperations determined in accordance with US GAAP is as follows:

 
| ** **                                                        | ** ** | **2003**    | ** ** |
|-------------------------------------------------------------------|------------|-------------|------------|
| ** **                                                        | ** ** | **Chile**   | ** ** | **Argentina** | ** ** | **Brazil** | ** ** | **Peru** | ** ** | **Colombia** | ** ** | **Total** | ** ** |
| ** **                                                        | ** ** | **ThCh$**   | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| Income tax provision under Chilean GAAP:                          |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Current income tax as determined under  Chilean GAAP              |       | (7,139,857  | )          | — |   | (2,425,749 | ) | (15,552,600 | ) | (28,068,579 | ) | (53,186,785 | ) |
| Deferred income taxes as determined under  Chilean GAAP           |       | (5,766,487  | )          | 35,154,769 |   | — |   | (5,563,709 | ) | 289,426 |   | 24,113,999 |   |
| Total income tax provision under Chilean  GAAP                    |       | (12,906,344 | )          | 35,154,769 |   | (2,425,749 | ) | (21,116,309 | ) | (27,779,153 | ) | (29,072,786 | ) |
|                                                              |       |        |       |   |   |   |   |   |   |   |   |   |   |
| US GAAP adjustments                                               |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Deferred tax effect of applying SFAS 109                          |       | 6,233,364   |       | (1,915,629 | ) | 6,101,943 |   | 5,827,980 |   | — |   | 16,247,658 |   |
| Deferred tax effect of adjustment to US  GAAP                     |       | (1,961,659  | )          | 60,683,786 |   | — |   | (19,954,206 | ) | (63,917 | ) | 38,704,004 |   |
| Total US GAAP adjustments                                         |       | 4,271,705   |       | 58,768,157 |   | 6,101,943 |   | (14,126,226 | ) | (63,917 | ) | 54,951,662 |   |
| Income tax related to cumulative change in  accounting principles |       | 95,465      |       | — |   | — |   | 40,914 |   | — |   | 136,379 |   |
| US GAAP reclassifications (1)                                     |       | 103,578     |       | — |   | — |   | — |   | — |   | 103,578 |   |
| Total income tax provision under US GAAP                          |       | (8,435,596  | )          | 93,922,926 |   | 3,676,194 |   | (35,201,621 | ) | (27,843,070 | ) | 26,118,833 |   |

 
| ** **                                                        | ** ** | **2004**    | ** ** |
|-------------------------------------------------------------------|------------|-------------|------------|
| ** **                                                        | ** ** | **Chile**   | ** ** | **Argentina** | ** ** | **Brazil** | ** ** | **Peru** | ** ** | **Colombia** | ** ** | **Total** | ** ** |
| ** **                                                        | ** ** | **ThCh$**   | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| Income tax provision under Chilean GAAP:                          |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Current income tax as determined under  Chilean GAAP              |       | (869,356    | )          | — |   | (1,925,850 | ) | (14,643,280 | ) | (37,239,653 | ) | (54,678,139 | ) |
| Deferred income taxes as determined under  Chilean GAAP           |       | (15,292,991 | )          | (14,533,674 | ) | — |   | (11,107,901 | ) | (1,177,454 | ) | (42,112,020 | ) |
| Total income tax provision under Chilean  GAAP                    |       | (16,162,347 | )          | (14,533,674 | ) | (1,925,850 | ) | (25,751,181 | ) | (38,417,107 | ) | (96,790,159 | ) |
|                                                              |       |        |       |   |   |   |   |   |   |   |   |   |   |
| US GAAP adjustments:                                              |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Deferred tax effect of applying SFAS 109                          |       | 1,799,683   |       | 8,488,756 |   | 674,481 |   | 1,853,892 |   | — |   | 12,816,812 |   |
| Deferred tax effect of adjustment to US  GAAP                     |       | 3,104,838   |       | 853,559 |   | — |   | (77,646,340 | ) | (93,294 | ) | (73,781,237 | ) |
| Total US GAAP adjustments                                         |       | 4,904,521   |       | 9,342,315 |   | 674,481 |   | (75,792,448 | ) | (93,294 | ) | (60,964,425 | ) |
| Total income tax provision under US GAAP                          |       | (11,257,826 | )          | (5,191,359 | ) | (1,251,369 | ) | (101,543,629 | ) | (38,510,401 | ) | (157,754,584 | ) |
| Income tax related to cumulative change in  accounting principles |       | (256,218    | )          | — |   | — |   | — |   | — |   | (256,218 | ) |
| Total income tax provision under US GAAP                          |       | (11,514,044 | )          | (5,191,359 | ) | (1,251,369 | ) | (101,543,629 | ) | (38,510,401 | ) | (158,010,802 | ) |

 

F-116

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| ** **                                              | ** ** | **2005**    | ** ** |
|---------------------------------------------------------|------------|-------------|------------|
| ** **                                              | ** ** | **Chile**   | ** ** | **Argentina** | ** ** | **Brazil** | ** ** | **Peru** | ** ** | **Colombia** | ** ** | **Total** | ** ** |
| ** **                                              | ** ** | **ThCh$**   | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| Income tax provision under Chilean GAAP:                |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Current income tax as determined under  Chilean GAAP    |       | (1,785,061  | )          | — |   | (2,778,300 | ) | (16,917,061 | ) | (38,659,926 | ) | (60,140,348 | ) |
| Deferred income taxes as determined under  Chilean GAAP |       | (28,219,999 | )          | (5,631,350 | ) | — |   | 1,573,498 |   | 463,813 |   | (31,814,038 | ) |
| Total income tax provision under Chilean  GAAP          |       | (30,005,060 | )          | (5,631,350 | ) | (2,778,300 | ) | (15,343,563 | ) | (38,196,113 | ) | (91,954,386 | ) |
|                                                    |       |        |       |   |   |   |   |   |   |   |   |   |   |
| US GAAP adjustments:                                    |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Deferred tax effect of applying SFAS 109                |       | (465,152    | )          | — |   | (283,793 | ) | 4,037,725 |   | — |   | 3,288,780 |   |
| Deferred tax effect of adjustment to US  GAAP           |       | (8,534,214  | )          | (284,856 | ) | — |   | (2,318,414 | ) | 59,721 |   | (11,077,763 | ) |
| Total US GAAP adjustments                               |       | (8,999,366  | )          | (284,856 | ) | (283,793 | ) | 1,719,311 |   | 59,721 |   | (7,788,983 | ) |
| Total income tax provision under US GAAP                |       | (39,004,426 | )          | (5,916,206 | ) | (3,062,093 | ) | (13,624,252 | ) | (38,136,392 | ) | (99,743,369 | ) |

 

----

(1) US GAAP reclassifications are tax related expenses that underChilean GAAP are classified as non-operating expenses, but under US GAAP wouldbe classified as income taxes, and are composed of the following items:

 
| ** **                            | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **ThCh$**                                  | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                  |       |                                       |       |   |   |   |   |
| Income tax on discontinued operations |       | 103,578                                    |       | — |   | — |   |
| Net income (charge)/credit            |       | 103,578                                    |       | — |   | — |   |

 

F-117

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

Deferredtax assets and liabilities in accordance with US GAAP as of each balance sheetdate are as follows:

 
| ** **                                | ** ** | **2004**       | ** ** | **2005**      | ** ** |
|-------------------------------------------|------------|----------------|------------|---------------|------------|
| ** **                                | ** ** | **ThCh$**      | ** ** | **ThCh$**     | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| ** **                                | ** ** | **Short-term** | ** ** | **Long-term** | ** ** | **Short-term** | ** ** | **Long-term** | ** ** |
| **Deferred income tax assets**            |       |           |       |          |       |   |   |   |   |
| Property, plant and equipment             |       | —         |       | 139,084,850   |       | — |   | 120,309,219 |   |
| Prepaid income                            |       | 31,841         |       | 1,058,277     |       | 114,122 |   | 980,214 |   |
| Derivative contracts                      |       | —         |       | 5,130,325     |       | — |   | 2,829,621 |   |
| Vacation accrual                          |       | 378,462        |       | —        |       | 412,871 |   | — |   |
| Tax losses (1)                            |       | —         |       | 82,425,182    |       | — |   | 54,224,954 |   |
| Contingencies                             |       | 193,077        |       | —        |       | 1,201,455 |   | — |   |
| Forward contracts and swaps               |       | 1,673,910      |       | —        |       | — |   | — |   |
| Allowance for doubtful accounts           |       | 21,055         |       | 67,868        |       | 5,534 |   | 5,430,194 |   |
| Salaries for construction-in-progress     |       | —         |       | 3,763,092     |       | — |   | — |   |
| Provision for employee obligations        |       | 301,441        |       | 755,653       |       | 359,780 |   | 1,164,730 |   |
| Provision for obsolete materials          |       | —         |       | 586,827       |       | — |   | 1,499,233 |   |
| Other                                     |       | 456,984        |       | 918,353       |       | 387,805 |   | 195,996 |   |
| Valuation allowance                       |       | —         |       | (33,160,885   | )          | — |   | (28,724,048 | ) |
| **Total deferred income tax assets**      |       | 3,056,770      |       | 200,629,542   |       | 2,481,567 |   | 157,910,113 |   |
|                                      |       |           |       |          |       |   |   |   |   |
| **Deferred income tax liabilities**       |       |           |       |          |       |   |   |   |   |
| Property, plant and equipment             |       | —         |       | (354,660,910  | )          | — |   | (313,887,748 | ) |
| Severance indemnities                     |       | —         |       | (1,293,562    | )          | — |   | (1,119,706 | ) |
| Derivative contracts                      |       | —         |       | —        |       | — |   | (2,746,797 | ) |
| Finance costs                             |       | —         |       | (13,449,698   | )          | — |   | (12,982,336 | ) |
| Capitalized interest on construction      |       | —         |       | (4,447,693    | )          | — |   | (4,063,474 | ) |
| Capitalized cost of studies               |       | —         |       | (8,399,073    | )          | — |   | (8,323,252 | ) |
| Capitalized spare parts used              |       | —         |       | (928,167      | )          | — |   | (840,151 | ) |
| Bonds discount                            |       | —         |       | (500,675      | )          | — |   | (412,255 | ) |
| Capitalized costs                         |       | —         |       | (2,544,103    | )          | — |   | — |   |
| Debt issue costs                          |       | —         |       | (1,161,143    | )          | — |   | — |   |
| Leasing                                   |       | —         |       | (366,961      | )          | — |   | (549,411 | ) |
| Investment in Argentina                   |       | —         |       | —        |       | — |   | (459,171 | ) |
| Other                                     |       | —         |       | (82,222       | )          | — |   | (2,684,731 | ) |
| **Total deferred income tax liabilities** |       | —         |       | (387,834,207  | )          | — |   | (348,069,032 | ) |
| **Net deferred tax balance**              |       | 3,056,770      |       | (187,204,665  | )          | 2,481,567 |   | (190,158,919 | ) |

 

Changesin the amount of deferred tax asset valuation allowance are as follows:

 
| ** **                                           | ** ** | **2004**    | ** ** | **2005**    | ** ** |
|------------------------------------------------------|------------|-------------|------------|-------------|------------|
| ** **                                           | ** ** | **ThCh$**   | ** ** | **ThCh$**   | ** ** |
|                                                 |       |        |       |        |       |
| Balance as of January 1,                             |       | (31,907,512 | )          | (33,160,885 | )          |
| Cumulative translation adjustment                    |       | 2,778,257   |       | 3,730,682   |       |
| Increase due to losses not expected to be  recovered |       | (4,031,630  | )          | 706,155     |       |
| Balance as of December 31,                           |       | (33,160,885 | )          | (28,724,048 | )          |

 

F-118

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

(1)Accumulated tax losses by country as of December 31, 2004 and 2005, are asfollows:

 
| ** **    | ** ** | **December 31, 2004** | ** ** | **December 31, 2005** | ** ** |
|---------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **    | ** ** | **Amount**                      | ** ** | **Year of  expiration**    | ** ** | **Amount** | ** ** | **Year of  expiration** | ** ** |
| ** **    | ** ** | **ThCh$**                       | ** ** | ** **                      | ** ** | **ThCh$** | ** ** | ** ** | ** ** |
| Chile         |       | 166,208,191                     |       | Do not expire                   |       | 105,388,559 |   | Do not expire |   |
| Argentina (1) |       | 77,774,938                      |       | 2007                            |       | 34,870,369 |   | 2007 |   |
| Colombia (2)  |       | 71,298,389                      |       | 2007                            |       | 68,869,138 |   | 2007 |   |
| Total         |       | 315,281,518                     |       |                            |       | 209,128,066 |   |   |   |

 

----

(1)   All tax losses were created in 2002 and allof them expire in 2007.

(2)   Management does not expect that thesubsidiaries in Colombia will be able to recover deferred tax assets related totax loss carry forwards. Thus, a valuation allowance has been recorded,resulting in net deferred tax assets related to tax loss carry forwards ofThCh$0 and ThCh$0 as of December 31, 2004 and 2005, respectively.

 

Taxlosses applied against taxable income in the years ended December 31, 2003,2004 and 2005 are as follows:

 
| ** ** | ** ** | **Year ended December 31,** | ** ** |
|------------|------------|--------------------------------------------|------------|
| ** ** | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** ** | ** ** | **ThCh$**                                  | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| Chile      |       | 84,574,249                                 |       | 30,310,262 |   | 55,044,058 |   |
| Argentina  |       | 342,092                                    |       | 34,404,617 |   | 40,201,965 |   |
| Colombia   |       | 390,168,319                                |       | 41,158,935 |   | — |   |
| Total      |       | 475,084,660                                |       | 105,873,814 |   | 95,246,023 |   |

 

F-119

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

Areconciliation of the Chilean Statutory income tax rate to the Company’seffective tax rate on net income calculated in accordance with US GAAP is asfollows:

 
| ** **                                                        | ** ** | **2003**    | ** ** |
|-------------------------------------------------------------------|------------|-------------|------------|
| ** **                                                        | ** ** | **Chile**   | ** ** | **Argentina** | ** ** | **Peru** | ** ** | **Brazil** | ** ** | **Colombia** | ** ** | **Total** | ** ** |
| ** **                                                        | ** ** | **ThCh$**   | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| Statutory US GAAP (16.5%)                                         |       | (41,117,209 | )          | 24,389,541 |   | (9,522,111 | ) | (1,159,441 | ) | (5,094,540 | ) | (32,503,760 | ) |
| Effect of difference in foreign tax rates                         |       | —      |       | 27,345,848 |   | (9,810,659 | ) | 4,835,636 |   | (6,792,722 | ) | 15,578,103 |   |
| Price-level restatement not accepted for  tax purposes            |       | 8,306,865   |       | — |   | — |   | — |   | (155,244 | ) | 8,151,621 |   |
| Non-deductible items                                              |       | (13,252,256 | )          | (2,453,645 | ) | (19,814,520 | ) | — |   | (22,649,762 | ) | (58,170,183 | ) |
| Non-taxable items                                                 |       | 23,299,464  |       | — |   | 5,481,528 |   | — |   | 12,071,322 |   | 40,852,314 |   |
| Prior years’ income tax                                      |       | 15,417,210  |       | 44,986,436 |   | — |   | — |   | — |   | 60,403,646 |   |
| Others                                                            |       | (1,288,711  | )          | (345,257 | ) | (1,576,772 | ) | — |   | (5,222,125 | ) | (8,432,865 | ) |
| US GAAP reclassifications (1)                                     |       | 103,578     |       | — |   | — |   | — |   | — |   | 103,578 |   |
| Tax benefit (expense) at effective tax rate                       |       | (8,531,059  | )          | 93,922,923 |   | (35,242,534 | ) | 3,676,195 |   | (27,843,071 | ) | 25,982,454 |   |
| Income tax related to cumulative change in  accounting principles |       | —      |       | — |   | 139,789 |   | — |   | — |   | 139,789 |   |
| Total income tax under US GAAP                                    |       | (8,531,059  | )          | 93,922,923 |   | (35,102,745 | ) | 3,676,195 |   | (27,843,071 | ) | 26,122,243 |   |

 

F-120

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| ** **                                                        | ** ** | **2004**    | ** ** |
|-------------------------------------------------------------------|------------|-------------|------------|
| ** **                                                        | ** ** | **Chile**   | ** ** | **Argentina** | ** ** | **Peru** | ** ** | **Brazil** | ** ** | **Colombia** | ** ** | **Total** | ** ** |
| ** **                                                        | ** ** | **ThCh$**   | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| Statutory US GAAP (17%)                                           |       | (23,249,611 | )          | 732,154 |   | (16,263,920 | ) | (5,850,802 | ) | (8,833,249 | ) | (53,465,428 | ) |
| Effect of difference in foreign tax rates                         |       | —      |       | 775,221 |   | (15,785,569 | ) | 4,599,431 |   | (11,171,463 | ) | (21,582,380 | ) |
| Price-level restatement not accepted for  tax purposes            |       | 1,027,149   |       | (3,193,248 | ) | (5,056,176 | ) | — |   | (7,638,227 | ) | (14,860,502 | ) |
| Non-deductible items                                              |       | (114,916    | )          | (420,647 | ) | (82,411,615 | ) | — |   | (12,920,883 | ) | (95,868,061 | ) |
| Non-taxable items                                                 |       | 11,640,707  |       | — |   | 1,709,767 |   | — |   | 6,257,802 |   | 19,608,276 |   |
| Prior years’ income tax                                      |       | (1,253,785  | )          | — |   | — |   | — |   | — |   | (1,253,785 | ) |
| Others                                                            |       | 692,630     |       | (3,084,837 | ) | 16,263,884 |   | — |   | (4,204,381 | ) | 9,667,296 |   |
| Tax benefit (expense) at effective tax rate                       |       | (11,257,826 | )          | (5,191,357 | ) | (101,543,629 | ) | (1,251,371 | ) | (38,510,401 | ) | (157,754,584 | ) |
| Income tax related to cumulative change in  accounting principles |       | (256,218    | )          | — |   | — |   | — |   | — |   | (256,218 | ) |
| Total income tax under US GAAP                                    |       | (11,514,044 | )          | (5,191,357 | ) | (101,543,629 | ) | (1,251,371 | ) | (38,510,401 | ) | (158,010,802 | ) |

 

F-121

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| ** **                                             | ** ** | **2005**    | ** ** |
|--------------------------------------------------------|------------|-------------|------------|
| ** **                                             | ** ** | **Chile**   | ** ** | **Argentina** | ** ** | **Peru** | ** ** | **Brazil** | ** ** | **Colombia** | ** ** | **Total** | ** ** |
| ** **                                             | ** ** | **ThCh$**   | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| Statutory US GAAP (17%)                                |       | (21,415,206 | )          | 4,345,803 |   | (9,005,129 | ) | (4,628,653 | ) | (12,269,502 | ) | (42,972,687 | ) |
| Effect of difference in foreign tax rates              |       | —      |       | 4,601,438 |   | (8,740,272 | ) | (4,628,653 | ) | (12,991,238 | ) | (21,758,725 | ) |
| Increase (decrease) in rates resulting from:           |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Price-level restatement not accepted for  tax purposes |       | 4,733,269   |       | (6,543,472 | ) | — |   | — |   | — |   | (1,810,203 | ) |
| Non-taxable items                                      |       | 5,895,462   |       | — |   | 6,411,530 |   | 6,195,213 |   | — |   | 18,502,205 |   |
| Non-deductable items                                   |       | (28,700,249 | )          | (6,861,976 | ) | (976,751 | ) | — |   | (10,674,548 | ) | (47,213,524 | ) |
| Effect of change in valuation allowance                |       | (614,315    | )          | — |   | — |   | — |   | 1,320,470 |   | 706,155 |   |
| Other                                                  |       | 1,096,613   |       | (1,457,999 | ) | (1,313,630 | ) | — |   | (3,521,574 | ) | (5,196,590 | ) |
| Tax benefit (expense) at effective tax rate            |       | (39,004,426 | )          | (5,916,206 | ) | (13,624,252 | ) | (3,062,093 | ) | (38,136,392 | ) | (99,743,369 | ) |
| Total income tax under US GAAP                         |       | (39,004,426 | )          | (5,916,206 | ) | (13,624,252 | ) | (3,062,093 | ) | (38,136,392 | ) | (99,743,369 | ) |

 

----

(1)Reclassifications consider tax effects related to discontinued operations.

 

F-122

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

Thefollowing table breaks down income before income taxes by country as ofDecember 31, 2003, 2004 and 2005, respectively.

 
| ** ** | ** ** | **Year ended December 31,** | ** ** |
|------------|------------|--------------------------------------------|------------|
| ** ** | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** ** | ** ** | **ThCh$**                                  | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|       |       |                                       |       |   |   |   |   |
| Chile      |       | 249,195,206                                |       | 136,762,418 |   | 125,971,800 |   |
| Argentina  |       | (147,815,400                               | )          | (4,306,788 | ) | (25,563,547 | ) |
| Peru       |       | 57,709,764                                 |       | 95,670,118 |   | 52,971,347 |   |
| Brazil     |       | 7,026,915                                  |       | 34,416,482 |   | 27,227,371 |   |
| Colombia   |       | 30,876,000                                 |       | 51,960,288 |   | 72,173,541 |   |
| Total      |       | 196,992,485                                |       | 314,502,518 |   | 252,780,512 |   |

 

**c)****    ****Segment disclosure**

 

TheCompany is primarily engaged in the generation of electricity in Chile,Argentina, Brazil, Colombia and Peru. The Company provides these and otherservices through two business segments:

 

•  Electricity

•  Public works and concessions

 

Asthe Company’s public works and concessions segment does not meet any of thequantitative thresholds for separate disclosure, the Company has not includedquantitative disclosures by operating segment.

 

Themethods of revenue recognition by segment are as follows:

 

•  Electricity

 

Revenueis recognized when energy and power output is delivered and capacity isprovided at rates specified under contract terms or prevailing market rates.

 

F-123

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

     •  **Public works and concessions**

 

Revenue is recognized asservices are provided.

 

A summary of activities presented in accordance withChilean GAAP by geographic area is as follows:

 
| ** ** | ** ** | **Revenues**                               | ** ** | **Long-lived assets**            | ** ** |
|------------|------------|--------------------------------------------|------------|---------------------------------------|------------|
| ** ** | ** ** | **Year ended December 31,** | ** ** | **As of December 31,** | ** ** |
| ** ** | ** ** | **2003**                                   | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** ** | ** ** | **ThCh$**                                  | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|       |       |                                       |       |                                  |       |   |   |   |   |   |   |   |   |
| Chile      |       | 486,732,660                                |       | 484,416,185                           |       | 547,813,766 |   | 1,959,588,918 |   | 1,981,213,993 |   | 2,256,415,918 |   |
| Argentina  |       | 108,883,488                                |       | 153,638,401                           |       | 156,794,764 |   | 579,208,095 |   | 507,865,552 |   | 433,374,230 |   |
| Brazil (1) |       | 32,698,123                                 |       | 43,518,445                            |       | 41,795,158 |   | 405,047,876 |   | 355,834,797 |   | — |   |
| Colombia   |       | 230,277,240                                |       | 260,448,293                           |       | 258,971,891 |   | 1,555,130,988 |   | 1,362,179,513 |   | 1,129,345,515 |   |
| Peru       |       | 118,655,306                                |       | 127,816,595                           |       | 117,663,290 |   | 670,562,783 |   | 607,913,326 |   | 577,989,331 |   |
| Total      |       | 977,246,817                                |       | 1,069,837,919                         |       | 1,123,038,869 |   | 5,169,538,660 |   | 4,815,007,181 |   | 4,397,124,994 |   |

 

----

(1)                      With the deconsolidation of Brazilian subsidiary Cachoeira Dourada, theequity method in CIEN and the change in accounting methods for Endesa Brazil(Note 10 (c) (iii.)) as of October 1, 2005, the Company no longer recognizesthe long-lived assets of these subsidiaries.

 

**d)****             ****Concentration of risk:**

 

The Company does not believe that it is exposed to any unusual creditrisk from any single financial institution. The Company’s debtors are dependenton the economy in Latin America, which could make them vulnerable to downturnsin the economic activity in the countries in which the Company operates.

 

The only customer which accounted for more than 10% of revenues for theyears ending December 31, 2003, 2004 and 2005, respectively was ChilectraS.A., a related company, which’s participation in consolidated revenuesamounted to 10.5%, 11.9% and 12.6% for the years ended December 31, 2003,2004 and 2005, respectively.

 

F-124

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**e)****             ****Schedule of debt maturity:**

 

Following is a schedule ofdebt maturity in each of the next five years and thereafter:

 

| ** ** | ** ** | **As of  December 31,  2005** | ** ** |
|------------|------------|-----------------------------------------|------------|
| ** ** | ** ** | **ThCh$**                               | ** ** |
|       |       |                                    |       |
| 2006       |       | 372,363,819                             |       |
| 2007       |       | 106,600,227                             |       |
| 2008       |       | 243,024,219                             |       |
| 2009       |       | 323,609,298                             |       |
| 2010       |       | 167,086,208                             |       |
| Thereafter |       | 768,904,653                             |       |
| Total      |       | 1,981,588,424                           |       |

 

**f)****               ****Disclosure regarding interest capitalization under US GAAP:**

 
| ** **              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **              | ** ** | **ThCh$**                                  | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                    |       |                                       |       |   |   |   |   |
| Interest  cost incurred |       | 216,772,199                                |       | 199,490,197 |   | 178,794,037 |   |
| Interest  capitalized   |       | 8,945,446                                  |       | 7,463,017 |   | — |   |

 

F-125

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**g)****            ****Cash flow information**

 

The statement of cash flows under Chile GAAPdiffers in certain respects from the presentation of a statement of cash flowsunder US GAAP as follows:

 
| ** **                                                         | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                         | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                         | ** ** | **ThCh$**                                  | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                                               |       |                                       |       |   |   |   |   |
| Cash provided by operating activities under Chilean GAAP           |       | 297,408,783                                |       | 261,346,995 |   | 270,927,603 |   |
| Development stage companies                                        |       | 111,498                                    |       | — |   | — |   |
| Cash provided by operating activities under US GAAP                |       | 297,520,281                                |       | 261,346,995 |   | 270,927,603 |   |
|                                                               |       |                                       |       |   |   |   |   |
| Cash used in financing activities under Chilean GAAP and US GAAP   |       | (340,779,306                               | )          | (114,062,769 | ) | (367,063,622 | ) |
|                                                               |       |                                       |       |   |   |   |   |
| Cash provided by (used in) investing activities under Chilean GAAP |       | 118,526,131                                |       | (73,477,439 | ) | (55,117,624 | ) |
| Cash provided by (used in) investing activities under US GAAP      |       | 118,526,131                                |       | (73,477,439 | ) | (55,117,624 | ) |

 

Cash and cash equivalentsincludes all highly liquid debt instruments purchased with a maturity of threemonths or less:

 
| ** **                                                    | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                    | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                                          |       |                                  |       |   |   |   |   |
| Cash                                                          |       | 5,849,458                             |       | 30,705,233 |   | 10,023,121 |   |
| Time deposits and repurchase agreements                       |       | 166,661,507                           |       | 206,742,226 |   | 69,470,653 |   |
| Marketable securities                                         |       | 1,265,443                             |       | 706,217 |   | 1,870,988 |   |
| Total cash and cash equivalents under Chilean GAAP            |       | 173,776,408                           |       | 238,153,676 |   | 81,364,762 |   |
| Cash and cash equivalents held by development stage companies |       | 158,555                               |       | — |   | — |   |
| Total cash and cash equivalents under US GAAP                 |       | 173,934,963                           |       | 238,153,676 |   | 81,364,762 |   |

 

Additional disclosures required under US GAAP are asfollows:

 
| ** **                                                | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **ThCh$**                                  | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                                      |       |                                       |       |   |   |   |   |
| Interest  paid during the year, net of amount capitalized |       | 209,692,926                                |       | 186,176,873 |   | 164,745,463 |   |
| Income taxes  paid during the year                        |       | 106,557,551                                |       | 125,206,778 |   | 145,107,850 |   |
| Assets  acquired under leasing                            |       | —                                     |       | 28,486,126 |   | — |   |

 

F-126

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

UnderChilean GAAP in accordance with Technical Bulletin No. 50 “Cashflow statement” of the Chilean Association of Accountants, the effects of foreign exchange changes oncash and cash equivalents are not required to be disclosed separately in thestatement of cash flows. Pursuant to the comprehensive basis of preparation ofprice-level adjusted financial statements under US GAAP the effects of foreignexchange gains or losses and effects of inflation on cash and cash equivalentsare separately disclosed as presented in the table below:

 
| ** **               | ** ** | **Year ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **               | ** ** | **ThCh$**                                  | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                     |       |                                       |       |   |   |   |   |
| Foreign  exchange losses |       | (35,222,828                                | )          | (14,379,314 | ) | (10,355,981 | ) |
| Effects of  inflation    |       | 2,115,655                                  |       | 4,791,240 |   | 4,820,710 |   |

 

**h)****            ****Disclosures about fair value of financialinstruments**

 

The following methods andassumptions were used to estimate the fair value of each class of financialinstruments as of December 31, 2004 and 2005 for which it is practicableto estimate that value:

 

     •  **Cash**

 

The fair value of theCompany’s cash is equal to its carrying value.

 

**Time deposits and marketable securities**

 

The fair value of timedeposits approximates carrying value due to their relatively short-term nature.

 

     •  **Long-term accounts receivable**

 

Thefair value of long-term accounts receivable was estimated using the interestrates that are currently offered for loans with similar terms and remainingmaturities.

 

**Long-term debt**

 

The fair value oflong-term debt was based on rates currently available to the Company for debtwith similar terms and remaining maturities.

 

     •  **Derivative instruments**

 

Estimates of fair values of derivative instruments for which no quotedprices or secondary market exists have been made using valuation techniquessuch as forward pricing models, present value of estimated future cash flows,and other modeling techniques. These estimates of fair value includeassumptions made by the Company about market variables that may change inthe future. Changes in assumptions could have a significant impact on theestimate of fair values disclosed. As a result such fair value amounts aresubject to significant volatility and are highly dependent on the quality ofthe assumptions used.

 

F-127

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

The estimated fair values of the Company’sfinancial instruments compared to US GAAP carrying amounts are as follows:

 
| ** **                                       | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **Carrying  Amount**                  | ** ** | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| ** **                                       | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                             |       |                                  |       |   |   |   |   |   |   |
| Cash                                             |       | 30,705,233                            |       | 30,705,233 |   | 10,023,121 |   | 10,023,121 |   |
| Time deposits                                    |       | 193,370,032                           |       | 193,370,032 |   | 60,468,287 |   | 60,468,287 |   |
| Marketable securities                            |       | 706,217                               |       | 706,217 |   | 1,870,988 |   | 1,870,988 |   |
| Current receivables, net                         |       | 109,251,776                           |       | 109,251,776 |   | 99,540,291 |   | 99,540,291 |   |
| Notes receivables, net                           |       | 215,030                               |       | 215,030 |   | — |   | — |   |
| Other receivables, net                           |       | 37,301,733                            |       | 37,301,733 |   | 36,655,265 |   | 36,655,265 |   |
| Amounts due from related companies               |       | 152,352,416                           |       | 152,352,416 |   | 35,383,865 |   | 35,383,865 |   |
| Long term receivables                            |       | 36,288,858                            |       | 36,288,858 |   | 26,436,799 |   | 26,436,799 |   |
| Long term amounts due from related companies     |       | 346,507                               |       | 346,507 |   | 89,827,361 |   | 89,827,361 |   |
| Derivative contracts (Assets)                    |       | 32,880,176                            |       | 32,880,176 |   | 57,683,035 |   | 57,683,035 |   |
| Accounts payable                                 |       | (83,963,370                           | )          | (83,963,370 | ) | (55,935,840 | ) | (55,935,840 | ) |
| Dividends payable                                |       | (184,094                              | )          | (184,094 | ) | (4,690,151 | ) | (4,690,151 | ) |
| Short term amounts payables to related companies |       | (6,613,248                            | )          | (6,613,248 | ) | (7,170,361 | ) | (7,170,361 | ) |
| Debt, notes payable and bonds payable            |       | (2,398,145,074                        | )          | (2,552,858,135 | ) | (1,981,588,424 | ) | (2,158,743,831 | ) |
| Long term accounts payable to related companies  |       | (52,980                               | )          | (52,980 | ) | — |   | — |   |
| Derivative contracts (Liabilities)               |       | (62,769,008                           | )          | (62,769,008 | ) | (50,264,915 | ) | (50,264,915 | ) |

 

F-128

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**i)**                Derivativeinstruments

** **

TheCompany is exposed to the impact of market fluctuations in the price ofelectricity, natural gas, petroleum, coal, and other energy-related products,interest rates, and foreign exchange rates. The Company has policies andprocedures in place to manage the risks associated with these marketfluctuations on a global basis through strategic contract selection, fixed-rateand variable-rate portfolio targets, net investment hedges, and financialderivatives. The Company has chosen to apply hedge accounting under US GAAP forderivatives and non-derivative instruments that meet the criteria for hedgeaccounting under SFAS 133, the accounting treatment for these instrumentsdepends on whether they qualify as fair value, cash flow or net investmenthedges. Derivatives that do not meet hedge criteria are accounted at fair valuewith changes in fair value recorded in earnings.

 

The Company has a number of contractsdenominated in US dollars or with indexation features linked to the US dollar.According to SFAS 133, a contract with payments not expressed in the local orfunctional currency of any substantial party to the contract may beexcluded from the normal purchase and sale exception or may be consideredto have an embedded derivative that requires bifurcation. For purposes ofevaluating the functional currency of the Company’s subsidiaries in Argentina,Peru, Brazil, and Colombia, the Company applied BT 64, consistent with themethodology described in paragraph I p), thus the functional currency of thesesubsidiaries was considered to be the US dollar as these subsidiaries’financial statements were re-measured into US dollars because they are foreignsubsidiaries that operate in countries exposed to significant risks as determinedunder BT 64.

 

Thefollowing is a summary of the Company’s adjustments in consolidated companiesto other assets and liabilities related to the fair values for all identifiedderivative contracts as of December 31, 2004 and 2005.

 
| ** **                                    | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** |
|                                          |       |                                  |       |   |   |
| Commodity  derivatives—assets            |       | 23,078,417                            |       | 18,712,414 |   |
| Commodity  derivatives—liabilities       |       | (40,863,749                           | )          | (39,770,895 | ) |
| Embedded  derivatives—assets             |       | 9,801,760                             |       | 38,970,611 |   |
| Embedded  derivatives—liabilities        |       | (12,520,464                           | )          | (10,359,153 | ) |
| Financial  derivatives—assets            |       | —                                |       | — |   |
| Financial  derivatives—liabilities       |       | (673,574                              | )          | (134,867 | ) |
| Total  derivative adjustment (paragraph I p)  |       | (21,177,610                           | )          | 7,418,110 |   |
| Effects of  minority interest (paragraph I t) |       | 1,905,403                             |       | 1,800,194 |   |
| Deferred tax  effects (paragraph I c)         |       | 5,015,817                             |       | 59,896 |   |
| Net effect  of adjustment                     |       | (14,256,390                           | )          | 9,278,200 |   |

 

F-129

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

*Commodity derivatives*

 

The Company has generation and distribution commodity contracts thatmeet the definition of a derivative under SFAS 133 and are required to beaccounted for at fair value. These derivative contracts were evaluated forqualification under the normal purchase and sale exception. A number ofcontracts could not qualify under such exemption because they had prices tiedto an unrelated underlying such as a local and/or foreign inflationary index.

 

The Company has commodity contracts that are unique, due to their long-termnature and complexity. In establishing the fair value of contracts managementmakes assumptions using available market data and pricing models. Factors suchas commodity price risk and credit risk of counter-parties are also included inthe fair value calculation. Inputs to pricing models include estimated forwardprices of electricity and natural gas, interest rates, foreign exchange rates,inflation indices, transmission costs, and others. These inputs become moredifficult to predict and the estimates are less precise, the further out intime these estimates are made. As a result, fair values are highly sensitive tothe assumptions being used.

 

The Company’s Argentine generation entities have access to theBrazilian energy market through an interconnection system between the twomarkets. In order to calculate the fair values of the electricity purchase andsale contracts related to this interconnection business, the Argentineelectricity forward prices were used as a benchmark for all contracts includedin this portfolio. The Company considers the Argentine prices to be the correctbenchmark to calculate the fair value of the interconnection contracts becausethe Company does not have concessions to sell the Argentine generated energy inthe Brazilian spot or forward market to any parties other than those currentlycontracted. Therefore the Company views the interconnection as an extension ofthe Argentine market. Such values are included in the reconciliation to US GAAPin paragraph I (w).

 

*Embedded Derivative Contracts*

 

The Company enters into certain contractsthat have embedded features that require bifurcation and fair value accountingwith changes in fair value recorded in earnings, as mandated by SFAS 133.Embedded derivatives that were held as of December 31, 2004 and 2005corresponded to foreign currency and indexation features embedded in leases andservice type contracts.

 

*Financial Derivatives*

 

Changes in interest rates expose the Companyto risk as a result of its portfolio of fixed-rate and variable-rate debt. TheCompany manages interest rate risk exposure on a global basis by limiting itsvariable-rate and fixed-rate exposures to certain variable/fixed mixes set bythe risk management policy. The Company manages interest rate risk through theuse of interest rate swaps, collars and cross-currency swaps.

 

F-130

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

*Net Investment Hedges*

 

The Company is also exposed to foreigncurrency risk arising from long-term debt denominated in foreign currencies,the majority of which is the US dollar. This risk is mitigated partially as asubstantial portion of the Company’s revenue is either directly or indirectlylinked to the US dollar. Additionally, the Company has designated certainnon-derivative instruments as hedges of net investments in foreign operations.The accounting treatment for such operations is the same under Chilean GAAP andUS GAAP (see Note 10 g. and Note 19 d. for further detail). The changes in thecumulative translation adjustment are presented net of foreign currency gainsor losses of debt designated as hedges of foreign net investments. Gains relatedto debt designated as hedges of ThCh$107,254,514, ThCh$57,873,661 and ThCh$105,427,060were included in the cumulative translation adjustment for the years ended December 31,2003, 2004 and 2005, respectively.

 

The Company also uses short duration forward foreigncurrency contracts, swaps, and cross-currency swaps, where possible, to manageits risk related to foreign currency fluctuations.

 

**j)****                Reclassificationsunder US GAAP**

 

Certain reclassifications would be made tothe Chilean GAAP income statement in order to present Chilean GAAP amounts inaccordance with presentation requirements under US GAAP. Amortization ofnegative goodwill, amortization of goodwill, and certain other non-operatingincome and expense, would be included in operating income under US GAAP. Recoverabletaxes included in other non-operating revenues would be recorded as part ofincome taxes under US GAAP. Equity participation in income or losses of relatedcompanies included in non-operating income would be presented after incometaxes and minority interest in accordance with US GAAP. Income fromdiscontinued operations would be presented after income from continuingoperations under US GAAP.

 

F-131

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

(i)                         The most significant reclassifications from other operating income underChilean GAAP to operating income  under US GAAPare presented as follow:

 
| ** **                                                                                                    | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                                                    | ** ** | **ThCh$**                                   | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| ** **                                                                                                    | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  operating income under Chilean GAAP**                                                                |       | 47,332,392                                  |       | 53,086,548 |   | 33,280,139 |   |
| Gain on sale  of fixed assets                                                                                 |       | 1,763,021                                   |       | 7,065,663 |   | 4,073,304 |   |
| Energy and  power settlement                                                                                  |       | 2,564,471                                   |       | 12,481,492 |   | 7,537,107 |   |
| Indemnities  and commissions                                                                                  |       | 2,425,966                                   |       | 10,050 |   | 1,838,037 |   |
| Recovery of  expenses and clients’ portfolio                                                             |       | 12,374,332                                  |       | 14,851,064 |   | 3,358,134 |   |
| Gains on  service and other contracts                                                                         |       | 1,014,206                                   |       | 269,174 |   | 771,870 |   |
| Gains on  sales of other assets                                                                               |       | 5,291                                       |       | 26,563 |   | — |   |
| Total  reclassifications                                                                                      |       | 20,147,287                                  |       | 34,704,006 |   | 17,578,452 |   |
| **Total  other operating income as classified under US GAAP but calculated in  accordance with Chilean GAAP** |       | 27,185,105                                  |       | 18,382,542 |   | 15,701,687 |   |

 

(ii)                      The most significant reclassifications from other operating expensesunder Chilean GAAP to operating  expenses under US GAAP are presented as follow:

 
| ** **                                                                                                      | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                                                      | ** ** | **ThCh$**                                   | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| ** **                                                                                                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  operating expenses under Chilean GAAP**                                                                |       | 63,779,969                                  |       | 82,140,231 |   | 53,586,357 |   |
| Loss on sale  of fixed assets                                                                                   |       | 8,151,016                                   |       | 533,832 |   | 390,963 |   |
| Retirement  benefits and severance indemnities                                                                  |       | 1,329,606                                   |       | — |   | 849,856 |   |
| Board of  directors compensation                                                                                |       | 256,918                                     |       | 227,250 |   | 228,669 |   |
| Contingencies  and litigation                                                                                   |       | 6,870,266                                   |       | 7,708,504 |   | 15,996,830 |   |
| Energy and  power settlement                                                                                    |       | 2,842,448                                   |       | 26,621,155 |   | 8,507,909 |   |
| Recalculation  of pension liabilities                                                                           |       | 619,885                                     |       | — |   | — |   |
| Costs of  sales of materials and fixed assets                                                                   |       | 443,183                                     |       | — |   | 223,408 |   |
| Loss on  sales of other assets                                                                                  |       | 429,506                                     |       | 218,883 |   | — |   |
| Provision  for obsolescence of fixed assets                                                                     |       | 11,100,745                                  |       | — |   | — |   |
| Provision  for obsolescence of inventory                                                                        |       | 389,347                                     |       | 111,921 |   | — |   |
| Total  reclassifications                                                                                        |       | 32,432,920                                  |       | 35,421,545 |   | 26,197,635 |   |
| **Total  other operating expenses as classified under US GAAP but calculated in  accordance with Chilean GAAP** |       | 31,347,049                                  |       | 46,718,686 |   | 27,388,722 |   |

 

F-132

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

(iii)            Thecondensed consolidated statements of income for the years ended December 31under US GAAP and classified in accordance with US GAAP are presented as follows:

 
| ** **                                                                                      | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                                      | ** ** | **ThCh$**                                   | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                                                                            |       |                                        |       |   |   |   |   |
| Sales                                                                                           |       | 977,246,817                                 |       | 1,069,837,919 |   | 1,123,038,869 |   |
| Other  operating income                                                                         |       | 20,147,287                                  |       | 34,704,005 |   | 33,736,087 |   |
| Costs of  sales                                                                                 |       | (762,708,627                                | )          | (645,188,646 | ) | (665,995,993 | ) |
| Administrative  and selling expenses                                                            |       | (68,531,407                                 | )          | (71,107,071 | ) | (64,775,031 | ) |
| Operating  income                                                                               |       | 166,154,070                                 |       | 388,246,207 |   | 426,003,932 |   |
| Non-operating  income and expenses, net                                                         |       | (154,901,403                                | )          | (192,113,401 | ) | (158,227,166 | ) |
| Income taxes                                                                                    |       | 25,982,453                                  |       | (157,754,584 | ) | (99,743,369 | ) |
| Minority  interest                                                                              |       | (7,982,563                                  | )          | 7,556,408 |   | (52,761,115 | ) |
| Equity  participation in income of related companies, net                                       |       | 47,990,789                                  |       | 19,895,847 |   | (14,996,257 | ) |
| Income from  continuing operations                                                              |       | 77,243,346                                  |       | 65,830,477 |   | 100,276,025 |   |
| Cumulative  effect of change in accounting principle                                            |       | (128,547                                    | )          | 1,250,948 |   | — |   |
| Income from  discontinued operations                                                            |       | 122,347                                     |       | — |   | — |   |
| Net income                                                                                      |       | 77,237,146                                  |       | 67,081,425 |   | 100,276,025 |   |
|                                                                                            |       |                                        |       |   |   |   |   |
| **Other  comprehensive income (loss):**                                                         |       |                                        |       |   |   |   |   |
| Gain (loss)  on hedge of the foreign currency exposure of net investment in foreign  operations |       | (12,125,841                                 | )          | (18,981,215 | ) | (15,132,065 | ) |
| Cumulative  translation adjustment                                                              |       | 22,212,818                                  |       | 10,301,859 |   | 14,258,974 |   |
| Fair value  change in hedging instruments                                                       |       | —                                      |       | — |   | (134,855 | ) |
| Comprehensive  income                                                                           |       | 87,324,123                                  |       | 58,402,069 |   | 99,268,079 |   |

 

F-133

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

(iv)                  Certain reclassifications would be made to the ChileanGAAP balance sheet in order to present Chilean GAAP amounts in accordance withpresentation requirements under US GAAP. Deferred taxes from depreciationdifferences that are recorded as short-term under Chilean GAAP would berecorded as long-term under US GAAP. Debt discounts are included in otherassets in Chilean GAAP while the discount would be offset against the debtunder US GAAP. The amounts receivable and payable related to financialderivatives have been recorded in the balance sheet at their gross amounts,whereas, these amounts would have been recorded at their net amounts byfinancial institution under US GAAP, provided the contracts have net settlementprovisions. Negative goodwill would be presented as a deduction to property,plant, and equipment instead of a separate line-item in other assets. Investmentsin companies in the development stage would be consolidated under US GAAP, asopposed to being presented as equity method investees, under Chile GAAP.

 

Thefollowing are summarized balance sheets of the Company using a US GAAPpresentation and amounts determined in accordance with US GAAP:

 
| ** **                                                 | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                                                 | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** |
| ** **                                                 | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Current  assets                                            |       | 565,748,659                           |       | 284,934,607 |   |
| Property,  plant, and equipment                            |       | 6,823,283,900                         |       | 5,917,395,226 |   |
| Accumulated  depreciation of property, plant and equipment |       | (2,626,403,176                        | )          | (2,369,338,641 | ) |
| Property,  plant, and equipment, net                       |       | 4,196,880,724                         |       | 3,548,056,585 |   |
| Goodwill                                                   |       | 183,891,485                           |       | 179,886,055 |   |
| Accumulated  amortization of goodwill                      |       | (138,348,723                          | )          | (138,883,357 | ) |
| Goodwill,  net                                             |       | 45,542,762                            |       | 41,002,698 |   |
| Other assets                                               |       | 365,101,402                           |       | 724,855,145 |   |
| Total assets                                               |       | 5,173,273,547                         |       | 4,598,849,035 |   |
|                                                       |       |                                  |       |   |   |
| Current liabilities                                        |       | 467,596,295                           |       | 556,300,380 |   |
| Long-term  liabilities                                     |       | 2,392,478,806                         |       | 1,903,627,299 |   |
| Minority  interest                                         |       | 1,077,407,187                         |       | 856,687,791 |   |
| Shareholders’  equity                                 |       | 1,235,791,259                         |       | 1,282,233,565 |   |
| Total  liabilities and shareholders’ equity           |       | 5,173,273,547                         |       | 4,598,849,035 |   |

 

F-134

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**k)****            Employee Benefit Plans**

 

Endesa-Chile and its subsidiaries sponsorvarious benefit plans for its current and retired employees. A description ofsuch benefits follows:

 

#### ***Severance indemnities***

#### ** **

The provision for severance indemnities, included in the account “Accruedliabilities” short and long-term is calculated in accordance with the policyset forth in Note 2 (p), using the current salary levels of all employeescovered under the severance indemnities agreement, an assumed discount rate of 6.0%for the year ended  December 31,2003 and 6.5% for the years ended December 31, 2004 and 2005,respectively, and an estimated average service period based on the years ofservices for the Company.

 

*Benefits forRetired Personnel*

 

Other benefits provided tocertain retired personnel of Endesa-Chile include electrical service ratesubsidies, additional medical insurance and additional post-retirement benefits.Descriptions of these benefits for retired personnel are as follows:

 

i)                     Electricalrate service

 

This benefit is extended only to certainretired personnel of Endesa-Chile. These electric rate subsidies result in theeligible retired employees paying a percentage of their total monthlyelectricity costs, with Endesa-Chile paying the difference.

 

ii)              Medicalbenefits

 

This benefit provides supplementary health insurance, which covers aportion of health benefits not covered under the institutional health benefitsmaintained by employees of Endesa-Chile. This benefit expires at the time ofdeath of the pensioner.

 

iii)           Supplementarypension benefits

 

Eligible employees are entitled to receive a monthly amount designed tocover a portion of the difference between their salary at the point ofretirement and the theoretical pension that would have been received had theemployee reached the legal retirement age of the *Instituciónde Previsión Social* (Institute of Social Welfare). This benefitexpires upon the death of the pensioner for the Endesa-Chile employee, however,continues to cover the surviving-spouse in the case of employees of Endesa Chile(individual entity).

 

iv)          Worker’scompensation benefits

 

Employees that were entitled to Worker’scompensation insurance in prior years for work related accidents receivebenefits from the Company as such insurance has expired. This benefit continuesat the time of death of the pensioner, to cover the surviving-spouse.

 

F-135

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

The Company has recognizedliabilities related to complementary pension plan benefits and otherpost-retirement benefits as stipulated in collective bargaining agreements.Under US GAAP pension and post-retirement employee benefits have been accountedfor in accordance with SFAS 87 and SFAS 106.. The effects of accounting forpost-retirement benefits under US GAAP have been presented in paragraph I (w),above. The following data are presented in accordance with US GAAP for theCompany’s post-retirement benefit plans.

 
| ** **                                           | ** ** | **Pensions Benefits** | ** ** | **Other Benefits** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| ** **                                           | ** ** | **Foreign**                | ** ** | **Chilean**             | ** ** | **Foreign** | ** ** |
| ** **                                           | ** ** | **2004**                   | ** ** | **2005**                | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **ThCh$**                  | ** ** | **ThCh$**               | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| ** **                                           | ** ** | ** **                 | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Changes  in benefit obligations**                  |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| Obligations  as of January 1                    |       | (18,153,947                | )          | (17,793,094             | )          | (9,653,313 | ) | (8,933,622 | ) | (3,207,814 | ) | (3,602,994 | ) |
| Foreign  exchange effect                             |       | (1,542,737                 | )          | 1,313,095               |       | — |   | — |   | (272,594 | ) | 258,831 |   |
| Net periodic  expense                                |       | (489,231                   | )          | (2,107,551              | )          | (285,652 | ) | (1,689,170 | ) | (457,212 | ) | 1,191,771 |   |
| Benefits  paid                                       |       | 2,392,821                  |       | 1,569,356               |       | 1,005,343 |   | 1,164,738 |   | 334,626 |   | 326,602 |   |
| Projected  benefit obligation as of December 31 |       | (17,793,094                | )          | (17,018,194             | )          | (8,933,622 | ) | (9,458,054 | ) | (3,602,994 | ) | (1,825,790 | ) |
|                                                 |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| **Funded  Status of the Plans**                      |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| Projected  Benefit Obligation                        |       | (17,793,094                | )          | (17,018,194             | )          | (8,933,622 | ) | (9,458,054 | ) | (3,602,994 | ) | (1,825,790 | ) |
| Fair value  of plan assets                           |       | —                     |       | —                  |       | — |   | — |   | — |   | — |   |
| Funded  status                                       |       | (17,793,094                | )          | (17,018,194             | )          | (8,933,622 | ) | (9,458,054 | ) | (3,602,994 | ) | (1,825,790 | ) |
| Net amount  recognized                               |       | (17,793,094                | )          | (17,018,194             | )          | (8,933,622 | ) | (9,458,054 | ) | (3,602,994 | ) | (1,825,790 | ) |
|                                                 |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| Accumulated  benefit obligation                      |       | (17,793,094                | )          | (17,018,194             | )          | (8,933,622 | ) | (9,458,054 | ) | (3,602,994 | ) | (1,825,790 | ) |

 

| ** **                                        | ** ** | **Pension Benefits** | ** ** |
|---------------------------------------------------|------------|---------------------------|------------|
| ** **                                        | ** ** | **Foreign**               | ** ** |
| ** **                                        | ** ** | **2003**                  | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                        | ** ** | **ThCh$**                 | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| ** **                                        | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assumptions  as of December 31**           | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted-average  discount rate                   |       | 12.70                     | %          | 12.00 | % | 11.20 | % |
| Weighted-average  salary increase                 |       | 7.50                      | %          | 6.90 | % | 6.10 | % |
| Weighted-average  return on plan assets           |       | —                    |       | — |   | — |   |
|                                              |       |                      |       |   |   |   |   |
| **Components  of net periodic Benefits expenses** |       |                      |       |   |   |   |   |
| Service cost                                      |       | (128,352                  | )          | (91,849 | ) | (92,719 | ) |
| Interest  cost                                    |       | (1,885,655                | )          | (2,376,439 | ) | (1,923,526 | ) |
| Expected  return on assets                        |       | —                    |       | — |   | — |   |
| Actuarial  gain (loss)                            |       | (2,906,991                | )          | 1,979,057 |   | (91,306 | ) |
| Net periodic  expenses                            |       | (4,920,998                | )          | (489,231 | ) | (2,107,551 | ) |

 

F-136

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 
| ** **                                        | ** ** | **Other Benefits** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **Chilean**             | ** ** | **Foreign** | ** ** |
| ** **                                        | ** ** | **2003**                | ** ** | **2004** | ** ** | **2005** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                        | ** ** | **ThCh$**               | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| ** **                                        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assumptions  as of December 31**           |       |                    |       |   |   |   |   |   |   |   |   |   |   |
|                                              |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Weighted-average  discount rate                   |       | 6.00                    | %          | 6.50 | % | 6.50 | % | 12.70 | % | 12.00 | % | 11.2 | % |
| Weighted-average  salary increase                 |       | 4.00                    | %          | 4.00 | % | 4.00 | % | 7.50 | % | 6.90 | % | 6.1 | % |
|                                              |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| **Components  of net periodic Benefits expenses** |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Service cost                                      |       | (525,855                | )          | (131,961 | ) | 68,970 |   | (13,519 | ) | (11,381 | ) | (12,380 | ) |
| Interest cost                                     |       | (365,822                | )          | (654,203 | ) | (500,324 | ) | (354,878 | ) | (420,048 | ) | (381,574 | ) |
| Expected  return on assets                        |       | —                  |       | — |   | — |   | — |   | — |   | — |   |
| Actuarial  gain (loss)                            |       | 412,264                 |       | 500,512 |   | (1,257,816 | ) | (373,096 | ) | (25,783 | ) | 1,585,725 |   |
| Amortization  of prior service obligation         |       | (532,150                | )          | — |   | — |   | — |   | — |   | — |   |
| Net periodic  expenses                            |       | (1,011,563              | )          | (285,652 | ) | (1,689,170 | ) | (741,493 | ) | (457,212 | ) | 1,191,771 |   |

 

The following is a schedule ofthe estimated pay-out of pension benefits in each of the next five years:

 
| ** ** | ** ** | **As of December 31,  2005** | ** ** |
|------------|------------|---------------------------------------------|------------|
| ** ** | ** ** | **ThCh$**                                   | ** ** |
|       |       |                                        |       |
| 2006       |       | 2,797,193                                   |       |
| 2007       |       | 2,590,633                                   |       |
| 2008       |       | 2,502,218                                   |       |
| 2009       |       | 2,374,809                                   |       |
| 2010       |       | 2,356,014                                   |       |
| Thereafter |       | 27,307,889                                  |       |
| Total      |       | 39,928,756                                  |       |

 

**l)****           Comprehensive income(loss)**

 

In accordance with US GAAP, the Companyreports a measure of all changes in shareholders’ equity that result fromtransactions and other economic events of the period other than transactionswith owners (“comprehensive income”). Comprehensive income is the total of netincome and other non-owner equity transactions that result in changes in netshareholders’ equity.

 

F-137

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

The following represents accumulated other comprehensive incomebalances as of December 31, 2003, 2004 and 2005 (in thousands of constantChilean pesos as of December 31, 2005).

 
| ** **                      | ** ** | **2003**                                                                                       | ** ** |
|---------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **Foreign currency  translation  adjustment related  to foreign  subsidiaries** | ** ** | **Chilean GAAP  cumulative  translation  adjustment** | ** ** | **Effect of US  GAAP  adjustments on  cumulative  translation  adjustment** | ** ** | **Accumulated  Other Comprehensive  Income (Loss)** | ** ** |
| Beginning  balance              |       | 11,543,072                                                                                     |       | 5,891,757 |   | (32,500,358 | ) | (15,065,529 | ) |
| Credit  (charge) for the period |       | (12,125,841                                                                                    | )          | (20,240,225 | ) | 42,453,043 |   | 10,086,977 |   |
| Ending  balance                 |       | (582,769                                                                                       | )          | (14,348,468 | ) | 9,952,685 |   | (4,978,552 | ) |

 
| ** **                      | ** ** | **2004**                                                                                       |
|---------------------------------|------------|------------------------------------------------------------------------------------------------|
| ** **                      | ** ** | **Foreign currency  translation  adjustment related  to foreign  subsidiaries** | ** ** | **Chilean GAAP  cumulative  translation  adjustment** | ** ** | **Effect of US  GAAP  adjustments on  cumulative  translation  adjustment** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** |
| Beginning  balance              |       | (582,769                                                                                       | ) | (14,348,468 | ) | 9,952,685 |   | (4,978,552 | ) |
| Credit  (charge) for the period |       | (18,981,215                                                                                    | ) | (7,967,740 | ) | 18,269,599 |   | (8,679,356 | ) |
| Ending  balance                 |       | (19,563,984                                                                                    | ) | (22,316,208 | ) | 28,222,284 |   | (13,657,908 | ) |

 
| ** **                      | ** ** | **2005**                                                                                       | ** ** |
|---------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **Foreign currency  translation  adjustment related  to foreign  subsidiaries** | ** ** | **Chilean GAAP  cumulative  translation  adjustment** | ** ** | **Effect of US  GAAP  adjustments on  cumulative  translation  adjustment** | ** ** | **Fair value  change of  financial  instruments  used in cash-flow hedges** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** |
| Beginning  balance              |       | (19,563,984                                                                                    | )          | (22,316,208 | ) | 28,222,284 |   | — |   | (13,657,908 | ) |
| Credit  (charge) for the period |       | (15,132,065                                                                                    | )          | (11,042,643 | ) | 25,301,617 |   | (134,855 | ) | (1,007,946 | ) |
| Ending balance                  |       | (34,696,049                                                                                    | )          | (33,358,851 | ) | 53,523,901 |   | (134,855 | ) | (14,665,854 | ) |

 

**m)****          Discontinued operations**

 

SFAS 144 establishes accounting and reporting standards forthe impairment and disposal of long-lived assets and discontinued operations.The application of this statement resulted in the classification, and separatefinancial presentation of certain entities as discontinued operations, theresults of which are not included in continuing operations. There was noimpairment of assets related to discontinued operations, as their fair valueexceeded their carrying value. Fair values used in these calculations have beendetermined by using the estimated sales prices.

 

F-138

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**n)****        Intangible assets**

 

The Company’s intangible assets were ThCh$29,087,073and ThCh$25,899,007 and related accumulated amortization was ThCh$8,669,907 andThCh$8,900,318 as of December 31, 2004 and 2005, respectively. All of theCompany’s intangible assets are subject to amortization and there is nodifference between Chilean and US GAAP in their basis. The Company expects toamortize approximately ThCh$985,300, ThCh$876,593, ThCh$853,289, ThCh$839,793 and ThCh$829,536 of intangible assets in 2006, 2007, 2008, 2009and 2010, respectively.

 

**o)****         Investments in relatedcompanies**

 

The following tables show combined summarized financial informationprepared in accordance with Chilean GAAP of the related companies accounted forusing the equity method for the purpose of complying with disclosurerequirement for significant equity investees. All amounts are in thousands ofconstant Chilean pesos of December 31, 2005 purchasing power.

 
| ** **                                       | ** ** | **2003**      | ** ** | **2004**    | ** ** | **2005**      | ** ** |
|--------------------------------------------------|------------|---------------|------------|-------------|------------|---------------|------------|
| ** **                                       | ** ** | **ThCh$**     | ** ** | **ThCh$**   | ** ** | **ThCh$**     | ** ** |
|                                             |       |          |       |        |       |          |       |
| Current  assets                                  |       | 176,682,587   |       | 155,422,706 |       | 605,158,831   |       |
| Non-current  assets                              |       | 864,796,365   |       | 775,587,587 |       | 2,571,961,689 |       |
| Total assets                                     |       | 1,041,478,952 |       | 931,010,293 |       | 3,177,120,520 |       |
|                                             |       |          |       |        |       |          |       |
| Current  liabilities                             |       | 361,840,556   |       | 135,684,837 |       | 652,766,251   |       |
| Non-current  liabilities                         |       | 366,693,158   |       | 491,523,447 |       | 1,007,101,103 |       |
| Total  liabilities                               |       | 728,533,714   |       | 627,208,284 |       | 1,659,867,354 |       |
|                                             |       |          |       |        |       |          |       |
| Net sales                                        |       | 252,960,847   |       | 305,342,150 |       | 343,788,721   |       |
| Gross profit                                     |       | 100,568,311   |       | 40,654,648  |       | 104,494,778   |       |
| Net income                                       |       | 27,226,426    |       | 29,106,062  |       | 61,469,039    |       |
|                                             |       |          |       |        |       |          |       |
| Endesa-Chile’s  participation in net income |       | 12,226,654    |       | 19,011,615  |       | 26,842,907    |       |

 

No discontinued operations have been includedin equity method investees as of December 31, 2003, 2004 and 2005.

 

F-139

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

The Company is requiredto present separate Chilean GAAP audited financial statements of Compañía de Interconexión Energética S.A. (“CIEN”)and Comercializadora deEnergía del Mercosur S.A. as of December 31, 2003, 2004 and 2005 and forthe three years ended December 31, 2005, and is required to present areconciliation to US GAAP for those companies as of December 31, 2003,2004 and 2005 and for the three years ended December 31, 2005, as thesecompanies met the definition of a significant subsidiary under Rule 1-02(w) of Regulation S-X as of December 31, 2005.

 

As of September 30, 2005, theCompany’s former equity investee CIEN became part of the Company’s new investeeEndesa Brasil. The Company is also required to present standalone financialstatements of Endesa Brasil together with a reconciliation of net income of theyear and for shareholders’ equity from Chilean GAAP to US GAAP. As CIEN nowforms part of Endesa Brasil, it is not included in the table above for the yearended December 31, 2005.

 

These financialstatements together with a reconciliation from Chilean GAAP to US GAAP ofshareholders’ equity and net income of the year are provided in Schedule II.

 

**p)****         Restrictions which limitthe payment of dividends by the registrant**

 

As stated in Note 27, theCompany has subsidiaries that must abide by certain financial ratios andcovenants that require minimum equity levels or that contain othercharacteristics that restrict the transfer of assets to the parent company. Theamounts of Endesa-Chile’s proportionate share of restricted net assets inconsolidated subsidiaries as of December 31, 2005 are as follows:

 
| **Subsidiary**                            | ** ** | **Proportionate Share  of Restricted Net  Assets** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                | ** ** | **ThCh$**                                                         | ** ** |
|                                      |       |                                                              |       |
| Pangue S.A.                               |       | 40,015,963                                                        |       |
| Pehuenche  S.A.                           |       | 158,209,784                                                       |       |
| Edegel S.A.                               |       | 60,019,388                                                        |       |
| Central  Hidroeléctrica Betania S.A. |       | 199,655,138                                                       |       |
| Total                                     |       | 457,900,273                                                       |       |

 

The amount of consolidated retained earnings which representsundistributed earnings of investees accounted for under the equity method as ofDecember 31, 2005 is ThCh$22,396,242.

 

F-140

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**q)****        ****Capital lease obligations**

 

 Minimum lease obligations for capital lease are presented net ofinterest expense, and as of December 31 are summarized as follows:

 
| ** **                        | ** ** | **2004**    | ** ** | **2005**    | ** ** |
|-----------------------------------|------------|-------------|------------|-------------|------------|
| ** **                        | ** ** | **ThCh$**   | ** ** | **ThCh$**   | ** ** |
| Short-term:                       |       |        |       |        |       |
| Lease  obligations                |       | 2,309,866   |       | 2,050,000   |       |
| Less:  interest expense           |       | (1,560,344  | )          | (1,345,272  | )          |
| Net  short-term lease obligations |       | 749,522     |       | 704,728     |       |
|                              |       |        |       |        |       |
| Long-term:                        |       |        |       |        |       |
| Lease  obligations                |       | 40,247,932  |       | 36,449,439  |       |
| Less  interest expense            |       | (15,735,236 | )          | (12,733,497 | )          |
| Net  long-term lease obligations  |       | 24,512,696  |       | 23,715,942  |       |
|                              |       |        |       |        |       |
| Weighted-average  interest rate   |       | 6.50        | %          | 6.50        | %          |

 

Futurepayments under capital leases are summarized as follows:

 

| **Year ended December 31, 2005** |   | **ThCh$**  |   |
|------------------------------------------------------|--------|------------|--------|
|                                                 |   |       |   |
| 2006                                                 |   | 704,728    |   |
| 2007                                                 |   | 750,535    |   |
| 2008                                                 |   | 799,320    |   |
| 2009                                                 |   | 851,276    |   |
| 2010                                                 |   | 906,609    |   |
| Thereafter                                           |   | 20,408,202 |   |
| **Total**                                            |   | 24,420,670 |   |

 

F-141

----

 

**Endesa-Chile and Subsidiaries**

**Notes to the Audited Consolidated FinancialStatements**

**Translation of financial statements originally issued in Spanish-SeeNote 2 (a)**

**(Restated for general price-level changes and expressed in thousands ofconstant**

**Chilean pesos as of December 31, 2005, except as stated)**

 

**r)****        ****Recent accounting pronouncements**

 

In February 2006 TheFASB issued SFAS 155, “Accounting for Certain Hybrid Financial Instruments—anamendment of FASB Statements No. 133 and 140.” The new statement:

 

a)              permits fair value re-measurement of anyhybrid financial instrument that contains an embedded derivative that otherwisewould require bifurcation;

 

b)             clarifies which interest-only strips andprincipal-only strips are not subject to the requirements of SFAS 133, “Accountingfor Derivative Instruments and Hedging Activities”;

 

c)              establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or that are hybrid financial instruments that containan embedded derivative requiring bifurcation;

 

d)             clarifies that concentrations of credit riskin the form of subordination are not embedded derivatives; and

 

e)              amends SFAS 140, “Accounting for Transfersand Servicing of Financial Assets and Extinguishments of Liabilities,” toeliminate the prohibition on a qualifying special-purpose entity from holding aderivative financial instrument that pertains to a beneficial interest otherthan another derivative financial instrument.

 

SFAS155 generally is effective for all financial instruments acquired or issuedafter the beginning of an entity’s first fiscal year that begins after 15 September 2006.The Company does not anticipate that the adoption of this statement will have amaterial effect on its financial position, results of operations or cash flows.

 

OnNovember 2, 2005, the FASB issued Financial Staff Position (“FSP”) FAS115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments, which nullifies certain requirements ofEmerging Issues Task Force Issue (“EITF”) No. 03-1, The Meaning ofOther-Than Temporary Impairment and Its Application to Certain Investments” andsupersedes EITF Abstracts Topic No. D-44, Recognition ofOther-Than-Temporary Impairment Upon the Planned Sale of a Security whose CostExceeds Fair Value. The guidance in this FSP shall be applied to reportingperiods beginning after December 15, 2005. The Company does not expect theadoption of this guidance will have a material effect on its financialposition, results of operations or cash flows.

 

F-142

----

 

**Schedule I**

**Endesa-Chile Individual Condensed FinancialStatements**

**(Restated for general price-level changes andexpressed in thousands of constant**

**Chilean pesos as of December 31, 2005, exceptas stated)**

 

**Schedule I—Condensedfinancial information of Empresa Nacional de Electricidad S.A. (“Endesa Individual”)**

 

1.                           Condensedbalance sheets of Endesa Individual under US GAAP as of December 31, 2004and 2005 are as follows:

 

| ** **                                                 | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                                                 | ** ** | **ThCh$**                             | ** ** | **ThCh$** | ** ** |
| ** **                                                 | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Current  assets                                            |       | 161,491,779                           |       | 220,186,981 |   |
| Property,  plant, and equipment                            |       | 2,138,156,710                         |       | 2,265,768,987 |   |
| Accumulated  depreciation of property, plant and equipment |       | (1,056,601,601                        | )          | (1,141,252,057 | ) |
| Property,  plant, and equipment, net                       |       | 1,081,555,109                         |       | 1,124,516,930 |   |
| Other assets                                               |       | 2,176,017,857                         |       | 1,626,012,654 |   |
| Total assets                                               |       | 3,419,064,745                         |       | 2,970,716,565 |   |
|                                                       |       |                                  |       |   |   |
| Current liabilities                                        |       | 270,978,574                           |       | 285,167,117 |   |
| Long-term  liabilities                                     |       | 1,912,294,912                         |       | 1,403,315,883 |   |
| Shareholders’  equity                                 |       | 1,235,791,259                         |       | 1,282,233,565 |   |
| Total  liabilities and shareholders’ equity           |       | 3,419,064,745                         |       | 2,970,716,565 |   |

 

2.                           Condensedincome statements of Endesa Individual under US GAAP for the years ended December 31,2003, 2004 and 2005 are as follows:

 
| ** **                                                                                      | ** ** | **2003**     | ** ** | **2004**     | ** ** | **2005**     | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
| ** **                                                                                      | ** ** | **ThCh$**    | ** ** | **ThCh$**    | ** ** | **ThCh$**    | ** ** |
|                                                                                            |       |         |       |         |       |         |       |
| Sales                                                                                           |       | 373,557,548  |       | 411,528,821  |       | 495,142,879  |       |
| Other  operating income                                                                         |       | 4,019,861    |       | 29,220,230   |       | 30,675,361   |       |
| Costs of  sales                                                                                 |       | (310,248,332 | )          | (314,704,066 | )          | (368,877,966 | )          |
| Administrative  and selling expenses                                                            |       | (38,231,835  | )          | (25,816,881  | )          | (34,243,105  | )          |
| Operating  income                                                                               |       | 29,097,242   |       | 100,228,104  |       | 122,697,169  |       |
| Non-operating  income and expenses, net                                                         |       | 76,081,491   |       | (52,985,538  | )          | (57,935,002  | )          |
| Income taxes                                                                                    |       | 17,795,663   |       | (335,804     | )          | (17,574,769  | )          |
| Equity  participation in income of related companies, net                                       |       | (45,737,250  | )          | 18,923,715   |       | 53,088,627   |       |
| Income from  before cumulative effect of change in accounting principle                         |       | 77,237,146   |       | 65,830,477   |       | 100,276,025  |       |
| Cumulative  effect of change in accounting principle                                            |       | —       |       | 1,250,948    |       | —       |       |
| Net income                                                                                      |       | 77,237,146   |       | 67,081,425   |       | 100,276,025  |       |
|                                                                                            |       |         |       |         |       |         |       |
| **Other  comprehensive income (loss):**                                                         |       |         |       |         |       |         |       |
| Gain (loss)  on hedge of the foreign currency exposure of net investment in foreign  operations |       | (12,125,841  | )          | (18,981,215  | )          | (15,132,065  | )          |
| Cumulative  translation adjustment                                                              |       | 22,212,818   |       | 10,301,859   |       | 14,258,974   |       |
| Cash Flow  Hedges                                                                               |       | —       |       | —       |       | (134,855     | )          |
| Comprehensive  income (loss)                                                                    |       | 87,324,123   |       | 58,402,069   |       | 99,268,079   |       |

 

G-1

----

 

**Schedule I**

**Endesa-Chile Individual Condensed FinancialStatements**

**(Restated for general price-level changes andexpressed in thousands of constant**

**Chilean pesos as of December 31, 2005, exceptas stated)**

 

3.                           Condensedcash-flow statements of Endesa Individual under US GAAP for the years ended December 31,2003, 2004 and 2005 are as follows:

 
| ** **                                                      | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                      | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **ThCh$**                                  | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                                            |       |                                       |       |   |   |   |   |
| **Net cash  provided by operating activities**                  | ** ** | **66,209,393**                             | ** ** | **67,500,345** | ** ** | **88,776,603** | ** ** |
| **Cash  flows from financing activities:**                      |       |                                       |       |   |   |   |   |
| Proceeds  from the issuance of debt                             |       | 38,925,043                                 |       | 67,504,753 |   | 8,643,577 |   |
| Proceeds  from bond issuances                                   |       | 580,848,417                                |       | — |   | — |   |
| Proceeds  from loans obtained from related companies            |       | —                                     |       | 3,173,555 |   | 40,146,172 |   |
| Other  sources of financing                                     |       | —                                     |       | 5,856,592 |   | — |   |
| Dividends  paid                                                 |       | —                                     |       | (20,051,263 | ) | (35,160,430 | ) |
| Payment of  debt                                                |       | (423,283,586                               | )          | (141,356,483 | ) | (82,200,282 | ) |
| Payment of  bonds                                               |       | (2,360,611                                 | )          | (2,512,833 | ) | (18,823,989 | ) |
| Payment of  loans obtained from related companies               |       | (115,334,518                               | )          | (3,845,767 | ) | (62,439,385 | ) |
| Payment of  bond issuance costs                                 |       | (6,033,071                                 | )          | (491,910 | ) | — |   |
| Other  disbursements for financing                              |       | (30,838,683                                | )          | (2,816,709 | ) | (3,791,094 | ) |
| Net cash  provided by (used in) financing activities            |       | 41,922,991                                 |       | (94,540,065 | ) | (153,625,431 | ) |
|                                                            |       |                                       |       |   |   |   |   |
| **Cash  flows from investing activities:**                      | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds  from sales of property, plant and equipment           |       | 140,424,608                                |       | 636,875 |   | 4,222,894 |   |
| Payments  received on loans to related companies                |       | 88,827,169                                 |       | 160,026,753 |   | 35,094,857 |   |
| Other  receipts from investments                                |       | 123,623,791                                |       | 88,602,179 |   | 127,822,328 |   |
| Additions to  property, plant and equipment                     |       | (115,847,221                               | )          | (67,607,416 | ) | (19,825,555 | ) |
| Long-term  investments                                          |       | (3,145,823                                 | )          | (1,221,198 | ) | (8,421,174 | ) |
| Other loans  granted to related companies                       |       | (266,846,012                               | )          | (107,393,226 | ) | (84,720,348 | ) |
| Other investment  disbursements                                 |       | (71,453,210                                | )          | — |   | (42,026,503 | ) |
| Net cash  provided used in investing activities                 |       | (104,416,700                               | )          | 73,043,967 |   | 12,146,499 |   |
| Net cash  flow for the year                                     |       | 3,715,684                                  |       | 46,004,247 |   | (52,702,329 | ) |
| Effect of  price-level restatement on cash and cash equivalents |       | 228,847                                    |       | (87,678 | ) | 11,244,059 |   |
| Net  (decrease) increase in cash and cash equivalents           |       | 3,944,532                                  |       | 45,916,569 |   | (41,458,270 | ) |
|                                                            |       |                                       |       |   |   |   |   |
| Cash and  cash equivalents beginning of year                    |       | 1,351,421                                  |       | 5,295,952 |   | 51,212,522 |   |
| Cash and  cash equivalents end of year                          |       | 5,295,952                                  |       | 51,212,522 |   | 9,754,252 |   |

 

G-2

----

 

**Schedule I**

**Endesa-Chile Individual Condensed FinancialStatements**

**(Restated for general price-level changes andexpressed in thousands of constant**

**Chilean pesos as of December 31, 2005, exceptas stated)**

 

4.                           Thefollowing table presents Endesa Individual’s long-term debt owed to banks andother financial institutions as of December 31, 2004 and 2005:

 
| ** **                                     | ** ** | **As of December 31, 2005** | ** ** | **As of  December  31, 2004**                     | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Currency**                                    | ** ** | **After 1 year  but within****2 years** | ** ** | **After 2 years  but within  3 years** | ** ** | **After 3  years  but within  5 years** | ** ** | **After 5 years  but within  10 years** | ** ** | **After 10  years** | ** ** | **Total long-term  portion** | ** ** | **Annual  interest  rate** | ** ** | **Total long-term  liabilities** | ** ** |
| ** **                                     | ** ** | ** **                                      | ** ** | **ThCh$**                                                   | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **%** | ** ** | **ThCh$** | ** ** |
| ** **                                     | ** ** | ** **                                      | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Financial institution**                      |       |                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                           |       |                                            |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Banco Nationale de Paris                       |       | US$                                             |       | 1,821,926                                                   |       | 2,339,263 |   | 2,204,304 |   | — |   | — |   | 6,365,493 |   | 5.78 |   | 9,808,203 |   |
| Citibank N.A. Nassau, Bahamas                  |       | US$                                             |       | —                                                      |       | — |   | 8,328,125 |   | — |   | — |   | 8,328,125 |   | 4.91 |   | 36,091,650 |   |
| Caja Madrid, Miami Agency                      |       | US$                                             |       | —                                                      |       |   |   | 4,330,625 |   | — |   | — |   | 4,330,625 |   | 4.91 |   | 36,091,650 |   |
| Export Development Corp. Loan                  |       | US$                                             |       | 733,748                                                     |       | 733,748 |   | 1,467,496 |   | 2,934,992 |   | — |   | 5,869,984 |   | 4.82 |   | 7,362,007 |   |
| Banque Nationale de París                 |       | US$                                             |       | 838,487                                                     |       | 838,487 |   | 1,676,974 |   | 4,192,436 |   | — |   | 7,546,384 |   | 5.98 |   | 9,447,761 |   |
| Banco Bilbao Vizcaya Argentaria S.A.           |       | US$                                             |       | —                                                      |       |   |   | 8,328,125 |   | — |   | — |   | 8,328,125 |   | 4.91 |   | 36,091,650 |   |
| Banco Santander Hispano S.A.                   |       | US$                                             |       | —                                                      |       |   |   | 8,328,125 |   | — |   | — |   | 8,328,125 |   | 4.91 |   | 36,091,650 |   |
| HSBC Bank plc, Spanish Branch                  |       | US$                                             |       | —                                                      |       | — |   | 5,552,083 |   | — |   | — |   | 5,552,083 |   | 4.91 |   | — |   |
| Banco San Paolo IMI S.P.A.                     |       | US$                                             |       | —                                                      |       | — |   | 6,662,500 |   | — |   | — |   | 6,662,500 |   | 4.91 |   | — |   |
| Deutsche Bank AG, New York Branch              |       | US$                                             |       | —                                                      |       | — |   | 2,220,833 |   | — |   | — |   | 2,220,833 |   | 4.91 |   | — |   |
| ING Bank N.V                                   |       | US$                                             |       | —                                                      |       | — |   | 10,660,000 |   | — |   | — |   | 10,660,000 |   | 4.91 |   | — |   |
| The Bank of Tokyo-Mitsubishi, Ltd. N.Y. Branch |       | US$                                             |       | —                                                      |       | — |   | 6,662,500 |   | — |   | — |   | 6,662,500 |   | 4.91 |   | — |   |
| ABN AMRO Bank                                  |       | US$                                             |       | —                                                      |       | — |   | 2,776,042 |   | — |   | — |   | 2,776,042 |   | 4.91 |   | — |   |
| Instituto de Crédito Oficial              |       | US$                                             |       | —                                                      |       | — |   | 2,776,042 |   | — |   | — |   | 2,776,042 |   | 4.91 |   | — |   |
| Total                                          |       |                                            |       | 3,394,161                                                   |       | 3,911,498 |   | 71,973,774 |   | 7,127,428 |   | — |   | 86,406,861 |   | — |   | 170,984,571 |   |

 

G-3

----

 

**Schedule I**

**Endesa-Chile Individual Condensed FinancialStatements**

**(Restated for general price-level changes andexpressed in thousands of constant**

**Chilean pesos as of December 31, 2005, exceptas stated)**

 

5.             The following tablepresents bonds payable as of December 31, 2004 and 2005:

 
| ** **              | ** ** | **Face value** | ** ** | ** **   | ** ** | **Interest** | ** ** | ** **   | ** ** | **Par value as of December 31,** | ** ** |
|-------------------------|------------|---------------------|------------|--------------|------------|--------------|------------|--------------|------------|-----------------------------------------------------------|------------|
| **Series**              | ** ** | **outstanding**     | ** ** | **Currency** | ** ** | **Rate**     | ** ** | **Maturity** | ** ** | **2004**                                                  | ** ** | **2005** | ** ** |
| ** **              | ** ** | ** **          | ** ** | ** **   | ** ** | **%**        | ** ** | ** **   | ** ** | **ThCh$**                                                 | ** ** | **ThCh$** | ** ** |
| 1                       |       | 230,000,000         |       | US$          |       | 7.88         |       | 02-01-2027   |       | 4,358,067                                                 |       | 3,867,773 |   |
| 2                       |       | 220,000,000         |       | US$          |       | 7.33         |       | 02-01-2037   |       | 3,877,448                                                 |       | 3,441,225 |   |
| 3                       |       | 200,000,000         |       | US$          |       | 8.13         |       | 02-01-2097   |       | 3,909,929                                                 |       | 3,470,053 |   |
| 1                       |       | 400,000,000         |       | US$          |       | 7.75         |       | 07-15-2008   |       | 8,204,834                                                 |       | 7,281,770 |   |
| 1                       |       | 400,000,000         |       | US$          |       | 8.50         |       | 04-01-2009   |       | 4,908,464                                                 |       | 4,356,250 |   |
| C-2, D-1,  D-2          |       | 1,043,873           |       | UF           |       | 6.80         |       | 11-01-2010   |       | 2,901,114                                                 |       | — |   |
| E-1, E-2                |       | 6,000,000           |       | UF           |       | 6.20         |       | 08-01-2006   |       | 2,738,956                                                 |       | 110,593,059 |   |
| F                       |       | 1,500,000           |       | UF           |       | 6.20         |       | 08-01-2022   |       | 684,740                                                   |       | 686,050 |   |
| 144A                    |       | 400,000,000         |       | US$          |       | 8.35         |       | 08-01-2013   |       | 8,036,407                                                 |       | 7,132,292 |   |
| 144A                    |       | 200,000,000         |       | US$          |       | 8.63         |       | 08-01-2015   |       | 4,150,540                                                 |       | 3,683,594 |   |
| G                       |       | 4,000,000           |       | UF           |       | 4.80         |       | 10-15-2010   |       | 709,208                                                   |       | 710,565 |   |
| H                       |       | 4,000,000           |       | UF           |       | 6.20         |       | 10-15-2008   |       | 912,984                                                   |       | 914,731 |   |
| Total current portion   |       |                |       |         |       |         |       |         |       | 45,392,691                                                |       | 146,137,362 |   |
|                    |       |                |       |         |       |         |       |         |       |                                                      |       |   |   |
| 1                       |       | 230,000,000         |       | US$          |       | 7.88         |       | 02-01-2027   |       | 132,817,272                                               |       | 117,875,000 |   |
| 2                       |       | 220,000,000         |       | US$          |       | 7.33         |       | 02-01-2037   |       | 127,042,608                                               |       | 112,750,000 |   |
| 3                       |       | 200,000,000         |       | US$          |       | 8.13         |       | 02-01-2097   |       | 115,493,280                                               |       | 102,500,000 |   |
| 1                       |       | 400,000,000         |       | US$          |       | 7.75         |       | 07-15-2008   |       | 230,986,560                                               |       | 205,000,000 |   |
| 1                       |       | 400,000,000         |       | US$          |       | 8.50         |       | 04-01-2009   |       | 230,986,560                                               |       | 205,000,000 |   |
| C-2, D-1,  D-2          |       | 1,043,873           |       | UF           |       | 6.80         |       | 11-01-2010   |       | 16,035,205                                                |       | — |   |
| E-1, E-2                |       | 6,000,000           |       | UF           |       | 6.20         |       | 08-01-2006   |       | 107,642,783                                               |       | — |   |
| F                       |       | 1,500,000           |       | UF           |       | 6.20         |       | 08-01-2022   |       | 26,910,696                                                |       | 26,962,215 |   |
| 144A                    |       | 400,000,000         |       | US$          |       | 8.35         |       | 08-01-2013   |       | 230,986,560                                               |       | 205,000,000 |   |
| 144A                    |       | 200,000,000         |       | US$          |       | 8.63         |       | 08-01-2015   |       | 115,493,280                                               |       | 102,500,000 |   |
| G                       |       | 4,000,000           |       | UF           |       | 4.80         |       | 10-15-2010   |       | 71,761,855                                                |       | 71,899,240 |   |
| H                       |       | 4,000,000           |       | UF           |       | 6.20         |       | 10-15-2008   |       | 71,761,855                                                |       | 71,899,240 |   |
| Total long-term portion |       |                |       |         |       |         |       |         |       | 1,477,918,514                                             |       | 1,221,385,695 |   |

 

6.                           Thefollowing table presents a schedule of debt maturity in each of the nextfive years and thereafter as of December 31, 2005:

 
| ** ** | ** ** | **As of December 31,  2005** | ** ** |
|------------|------------|---------------------------------------------|------------|
| ** ** | ** ** | **ThCh$**                                   | ** ** |
|       |       |                                        |       |
| 2006       |       | 150,460,720                                 |       |
| 2007       |       | 3,394,161                                   |       |
| 2008       |       | 210,708,979                                 |       |
| 2009       |       | 210,056,684                                 |       |
| 2010       |       | 146,150,052                                 |       |
| Thereafter |       | 737,482,680                                 |       |
| Total      |       | 1,458,253,276                               |       |

 

G-4

----

 

**Schedule I**

**Endesa-Chile Individual Condensed FinancialStatements**

**(Restated for general price-level changes andexpressed in thousands of constant**

**Chilean pesos as of December 31, 2005, exceptas stated)**

 

7.                           Thefollowing table presents the dividends received by Endesa Individual in the yearsended December 31, 2003, 2004 and 2005:

 
| ** **          | ** ** | **Year ended December 31,** | ** ** |
|---------------------|------------|--------------------------------------------|------------|
| ** **          | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **          | ** ** | **ThCh$**                                  | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                |       |                                       |       |   |   |   |   |
| Dividends  received |       | 75,098,297                                 |       | 79,639,327 |   | 48,015,055 |   |

 

G-5

----

 

*Consolidated Financial Statements*

 

***CIEN - COMPANHIA DE INTERCONEXÃOENERGÉTICA AND SUBSIDIARIES***

 

*December 31,2004 and 2003*

 

----

 

**Report of Independent Auditors**

 

To the Shareholders andBoard of Directors of

**CIEN – Companhia de InterconexãoEnergética:**

 

We have audited theaccompanying consolidated balance sheets of Companhia de InterconexãoEnergética S.A. – CIEN and its subsidiaries (“the Company”) as of December 31,2004 and the related consolidated statements of income, changes inshareholders’ equity and cash flows for the year then ended, all expressed inthousands of United States dollars. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. We were not engaged to perform an audit of the Company’sinternal control over financial reporting. Our audit included consideration ofinternal control over financial reporting as a basis for designing audit proceduresthat are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly we express no such opinion. An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Companhia de Interconexão Energética S.A. –CIEN and its subsidiaries as of December 31, 2004 and the results of theiroperations and their cash flow for the year then ended in conformity withaccounting principles generally accepted in Chile, which differ in certainrespects from accounting principles generally accepted in the United States ofAmerica (see Note 24 to the consolidated financial statements).

 

 
| ERNST & YOUNG             |  |
|-------------------------------|--|
| Auditores Independentes  S.S. |
| CRC –2SP 015.199/O-6     |

 

Brazil, São Paulo

May 3, 2005

 

H-1

----

 

CIEN - COMPANHIA DE INTERCONEXÃO ENERGÉTICA

 

CONSOLIDATEDBALANCE SHEETS AS OF DECEMBER 31, 2004 AND 2003

(Inthousands of US dollars)

 
| ** **                                   | ** ** | **2004**   | ** ** | **2003**                         | ** ** |
|----------------------------------------------|------------|------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | ** ** | ** ** | **Restated (note 2q)** | ** ** |
| ASSETS                                       |       |       |       |                             |       |
| CURRENT ASSETS                               |       |       |       |                             |       |
| Cash                                         |       | 4,336      |       | 4,816                            |       |
| Time deposits                                |       | 68,216     |       | 39,135                           |       |
| Trade accounts  receivable                   |       | 40,006     |       | 61,398                           |       |
| Miscellaneous  receivables                   |       | 1,064      |       | 2,541                            |       |
| Accounts  receivable from related parties    |       | 19,442     |       | 26,233                           |       |
| Recoverable  taxes                           |       | 6,634      |       | 8,249                            |       |
| Prepaid expenses                             |       | 106        |       | 31                               |       |
| Other                                        |       | 2,769      |       | 3,023                            |       |
| Total current  assets                        |       | 142,573    |       | 145,426                          |       |
|                                         |       |       |       |                             |       |
| PROPERTY, PLANT  AND EQUIPMENT               |       |       |       |                             |       |
| Land                                         |       | 5,819      |       | 5,819                            |       |
| Transmission  lines, machinery and equipment |       | 561,045    |       | 560,762                          |       |
| Other                                        |       | 70,964     |       | 82,346                           |       |
| Subtotal                                     |       | 637,828    |       | 648,927                          |       |
| Accumulated  depreciation                    |       | (69,096    | )          | (49,365                          | )          |
| Total property,  plant and equipment, net    |       | 568,732    |       | 599,562                          |       |
|                                         |       |       |       |                             |       |
| OTHER ASSETS                                 |       |       |       |                             |       |
| Long-term trade  accounts receivable         |       | 84,430     |       | 69,344                           |       |
| Other                                        |       | 35,828     |       | 25,344                           |       |
| Total other  assets                          |       | 120,258    |       | 94,688                           |       |
|                                         |       |       |       |                             |       |
| TOTAL ASSETS                                 |       | 831,563    |       | 839,676                          |       |

 

The accompanying notes are an integral part ofthese financial statements.

 

H-2

----

 
| ** **                                      | ** ** | **2004**   | ** ** | **2003**                         | ** ** |
|-------------------------------------------------|------------|------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | ** ** | ** ** | **Restated (note 2q)** | ** ** |
| LIABILITIES AND SHAREHOLDERS’  EQUITY      |       |       |       |                             |       |
| CURRENT LIABILITIES                             |       |       |       |                             |       |
| Due to banks and financial institutions         |       | 49,327     |       | 339,133                          |       |
| Dividends payable                               |       | 18,298     |       | 940                              |       |
| Accounts payable to related parties             |       | 33,532     |       | 87,798                           |       |
| Accounts payable                                |       | 22,447     |       | 27,482                           |       |
| Miscellaneous payables                          |       | 701        |       | 868                              |       |
| Provisions                                      |       | 3,459      |       | 1,594                            |       |
| Withholdings                                    |       | 3,135      |       | 209                              |       |
| Taxes payable                                   |       | 33,594     |       | 30,564                           |       |
| Total current liabilities                       |       | 164,493    |       | 488,588                          |       |
|                                            |       |       |       |                             |       |
| NON-CURRENT LIABILITIES                         |       |       |       |                             |       |
| Due to banks and financial institutions         |       | 275,466    |       | 32,121                           |       |
| Provisions                                      |       | 142,127    |       | 116,521                          |       |
| Deferred income tax                             |       | 10,694     |       | 8,996                            |       |
| Accounts payable to related parties             |       | 39,257     |       | —                           |       |
| Total non-current liabilities                   |       | 467,544    |       | 157,638                          |       |
|                                            |       |       |       |                             |       |
| MINORITY INTEREST                               |       | 2          |       | —                           |       |
|                                            |       |       |       |                             |       |
| SHAREHOLDERS’ EQUITY                       |       |       |       |                             |       |
| Paid-in capital                                 |       | 194,633    |       | 194,633                          |       |
| Accumulated deficit  (development stage)        |       | —     |       | (24,648                          | )          |
| Accumulated deficit                             |       | (1,183     | )          | (5,325                           | )          |
| Net income for the year                         |       | 26,398     |       | 29,896                           |       |
| Proposed dividends                              |       | (20,324    | )          | (1,106                           | )          |
| Total shareholders’ equity                 |       | 199,524    |       | 193,450                          |       |
|                                            |       |       |       |                             |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |       | 831,563    |       | 839,676                          |       |

 

The accompanying notes are an integral part ofthese financial statements.

 

H-3

----

 

CIEN - COMPANHIA DE INTERCONEXÃO ENERGÉTICA

 

CONSOLIDATEDSTATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of US dollars)

 
| ** **                                                 | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|----------|------------|----------|------------|
| ** **                                                 | ** ** | **Restated (note 2q)** | ** ** |
| OPERATING REVENUES AND COSTS                               |       |                             |       |     |       |     |       |
| Electricity sales and power billed to third parties        |       | 259,772                          |       | 278,037  |       | 232,344  |       |
| Electricity sales and power billed to related parties      |       | 112,964                          |       | 85,341   |       | 168      |       |
| Other operating revenues from third parties                |       | 6,538                            |       | —   |       | —   |       |
| Total operating revenues                                   |       | 379,274                          |       | 363,378  |       | 232,512  |       |
|                                                       |       |                             |       |     |       |     |       |
| OPERATING COSTS                                            |       |                             |       |     |       |     |       |
| Variable costs                                             |       |                             |       |     |       |     |       |
| Electricity purchases from related parties                 |       | (118,705                         | )          | (110,595 | )          | (113,307 | )          |
| Electricity purchases from third parties                   |       | (69,800                          | )          | (61,658  | )          | (17,900  | )          |
| Purchase of materials and inputs                           |       | (59                              | )          | (53      | )          | (38      | )          |
| Tolls and electricity  distribution                        |       | (29,163                          | )          | (7,328   | )          | (1,154   | )          |
| Other variable costs with third parties                    |       | (22,557                          | )          | (17,748  | )          | (9,338   | )          |
| Fixed costs                                                |       |                             |       |     |       |     |       |
| Payroll and other personnel costs                          |       | (673                             | )          | (576     | )          | (513     | )          |
| Depreciation                                               |       | (22,704                          | )          | (18,649  | )          | (11,727  | )          |
| Amortization                                               |       | (70                              | )          | (540     | )          | (2,151   | )          |
| Operating and maintenance cost of third parties            |       | (3,100                           | )          | (3,604   | )          | (3,450   | )          |
| Total operating costs                                      |       | (266,831                         | )          | (220,751 | )          | (159,578 | )          |
|                                                       |       |                             |       |     |       |     |       |
| OPERATING MARGIN                                           |       | 112,443                          |       | 142,627  |       | 72,934   |       |
|                                                       |       |                             |       |     |       |     |       |
| ADMINISTRATIVE AND SALES  EXPENSES                         |       |                             |       |     |       |     |       |
| General expenses and third parties administrative services |       | (5,445                           | )          | (3,112   | )          | (961     | )          |
| Payroll and personnel costs                                |       | (3,245                           | )          | (2,908   | )          | (2,243   | )          |
| Allowance for doubtful accounts                            |       | 279                              |       | (17      | )          | —   |       |
| Depreciation                                               |       | (16                              | )          | (23      | )          | (10      | )          |
| Total administrative and sales expenses                    |       | (8,427                           | )          | (6,060   | )          | (3,214   | )          |
|                                                       |       |                             |       |     |       |     |       |
| OPERATING RESULTS                                          |       | 104,016                          |       | 136,567  |       | 69,720   |       |
|                                                       |       |                             |       |     |       |     |       |
| NON-OPERATING RESULTS                                      |       |                             |       |     |       |     |       |
| Financial income from related parties                      |       | 5,613                            |       | —   |       | 2,687    |       |
| Financial income from third parties                        |       | 1,702                            |       | 6,115    |       | 12,265   |       |
| Equity in income (losses) of related companies             |       | —                           |       | —   |       | (7,873   | )          |
| Other non-operating income from third parties              |       | 1,456                            |       | 31,746   |       | 204      |       |
| Financial expenses with third parties                      |       | (26,175                          | )          | (34,734  | )          | (14,152  | )          |
| Other non-operating expenses with third parties            |       | (43,730                          | )          | (57,326  | )          | (41,050  | )          |
| Total non-operating results                                |       | (61,134                          | )          | (54,199  | )          | (47,919  | )          |
|                                                       |       |                             |       |     |       |     |       |
| INCOME (LOSS) BEFORE MINORITY INTEREST AND INCOME TAXES    |       | 42,882                           |       | 82,368   |       | 21,801   |       |
|                                                       |       |                             |       |     |       |     |       |
| INCOME TAXES                                               |       | (16,484                          | )          | (52,472  | )          | 559      |       |
|                                                       |       |                             |       |     |       |     |       |
| NET INCOME FOR THE YEAR                                    |       | 26,398                           |       | 29,896   |       | 22,360   |       |

 

The accompanying notes are an integral part of these financial statements.

 

H-4

----

 

CIEN - COMPANHIA DE INTERCONEXÃO ENERGÉTICA

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FORTHE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(Inthousands of US dollars)

 
| ** **                                                     | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|----------|------------|----------|------------|
| ** **                                                     | ** ** | **Restated (note 2q)** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                           |       |                             |       |     |       |     |       |
| Net income for the year                                        |       | 26,398                           |       | 29,896   |       | 22,360   |       |
| Depreciation                                                   |       | 22,720                           |       | 18,672   |       | 11,737   |       |
| Amortization                                                   |       | 289                              |       | 540      |       | 2,151    |       |
| Equity in income (losses) of related companies                 |       | —                           |       | —   |       | 7,873    |       |
| Foreign currency translation,  net                             |       | 4,536                            |       | (5,643   | )          | 51,694   |       |
| Other revenues and expenses that do not represent cash         |       | 3,262                            |       | —   |       | (18,444  | )          |
|                                                           |       |                             |       |     |       |     |       |
| Decrease (increase) in assets that affect the cash flows:      |       |                             |       |     |       |     |       |
| Trade accounts receivable                                      |       | 39,538                           |       | (50,105  | )          | (25,325  | )          |
| Accounts receivable from related parties                       |       | 6,791                            |       | (25,830  | )          | (383     | )          |
| Other                                                          |       | (16,446                          | )          | (13,237  | )          | (5,670   | )          |
|                                                           |       |                             |       |     |       |     |       |
| Increase (decrease) in liabilities that affect the cash flows: |       |                             |       |     |       |     |       |
| Due to banks and finanicial institutions                       |       | 791                              |       | (43,277  | )          | 9,532    |       |
| Dividends payable                                              |       | 17,358                           |       | 940      |       | —   |       |
| Accounts payable                                               |       | (5,035                           | )          | 6,284    |       | 32,806   |       |
| Accounts payable to related parties                            |       | (15,009                          | )          | 20,698   |       | 963      |       |
| Provisions                                                     |       | 27,325                           |       | 131,015  |       | 30       |       |
| Other                                                          |       | (19,117                          | )          | 17,604   |       | 12,486   |       |
| Minority interest                                              |       | —                           |       | —   |       | —   |       |
| Net cash provided by operating activities                      |       | 93,401                           |       | 87,557   |       | 101,810  |       |
|                                                           |       |                             |       |     |       |     |       |
| CASH FLOWS FROM FINANCING ACTIVITIES                           |       |                             |       |     |       |     |       |
| Loans and financing from third parties                         |       | —                           |       | —   |       | 66,750   |       |
| Loans and financing from related parties                       |       | —                           |       | —   |       | 3,000    |       |
| Payments of loans and financing to third parties               |       | (64,313                          | )          | —   |       | (68,759  | )          |
| Other                                                          |       | —                           |       | 10,931   |       | (16,272  | )          |
| Net cash used in financing activities                          |       | (64,313                          | )          | 10,931   |       | (15,281  | )          |
|                                                           |       |                             |       |     |       |     |       |
| CASH FLOWS FROM INVESTING ACTIVITIES                           |       |                             |       |     |       |     |       |
| Additions to property, plant and equipment                     |       | (466                             | )          | (75,600  | )          | (99,730  | )          |
| Investment in related company                                  |       | —                           |       | —   |       | (15,000  | )          |
| Loan to related parties                                        |       | —                           |       | —   |       | 14,246   |       |
| Other investments                                              |       | —                           |       | —   |       | 25,397   |       |
| Net cash used in investing activities                          |       | (466                             | )          | (75,600  | )          | (75,087  | )          |
|                                                           |       |                             |       |     |       |     |       |
| NET CASH FLOW FOR THE YEAR                                     |       | 28,622                           |       | 22,888   |       | 11,442   |       |
|                                                           |       |                             |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                   |       | 43,931                           |       | 17,495   |       | 6,053    |       |
| CASH OF NEWLY CONSOLIDATED ENTITIES 1/1/03                     |       | —                           |       | 3,548    |       | —   |       |
| CASH AND CASH EQUIVALENTS ON A CONSOLIDATED BASIS              |       | —                           |       | 21,043   |       | —   |       |
|                                                           |       |                             |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, END OF YEAR                         |       | 72,553                           |       | 43,931   |       | 17,495   |       |

 

The accompanying notes are an integral part of these financial statements.

 

H-5

----

 

CIEN– COMPANHIA DE INTERCONEXÃO ENERGÉTICA AND SUBSIDIARIES 

 

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2004 and 2003

(In thousands of U.S.dollars, unless otherwise indicated)

(Translation of reportoriginally issued in Spanish—See Note 2)

 

1.      BUSINESSDESCRIPTION

 

The Company’s primaryline of business involves producing, industrially processing, distributing andselling electric energy, including import and export activities, byimplementing the necessary services to achieve this business objective. TheCompany will conduct the project, planning and construction of facilitiesrelated to systems for producing, transmitting, converting and distributingelectric energy, by performing and obtaining the necessary investments fordeveloping the works to be done and the service provision. It will also be ableto carry out associated projects, and conduct activities inherent, related orcomplementary to the works and services that it will provide, including beingable to hold interest in other companies.

 

The Company wasconsidered the international winner in public bid No. 203.78006.0 for theBrazil - Argentina Interconnection and the purchase of firm power with associatedenergy imported from Argentina. The bid was promoted byCentrais Elétricas do Brasil S.A. – Eletrobrás through its subsidiariesCentrais Elétricas do Sul do Brasil S.A. – Eletrosul and Furnas CentraisElétricas S.A.. Therefore,the right to construct an electric energy transmission line between thesubstation of Rincón de Santa Maria (Argentina) and Itá (Brazil) was granted,with an approximate length of 507 km, to annually import 1,000 MW electricenergy from Argentina, for a period of 20 years.

 

On May 5, 1998, the firmpower sale contracts were signed with Eletrosul (300 MW annually) and Furnas(700 MW annually), for the aforementioned term granted. On December 13, 1999,the contract for the sale of firm power of 800 MW per year was signed with Copeland, therefore, the construction of a second transmission line of 488,772 kmstarted, considering an equal capacity of 1,050 MW. Finally, on December 31,2002 a contract for the sale of power and energy of 200 MW was signed withCERJ, for the term granted. At that date, the second transmission line wasfully operating. On December 10, 2003, the amendment to the contracts of COPELwas signed, which modified the energy supply contract from 800MW of firm powerto 400 MW of energy contracted at load factor 1:1, considering the contractterm reduction until 2015 (Note 4).

 

Due to the shareholdingrestructuring, ELETROSUL incorporated Tractebel Energia S.A. – TRACTEBEL, andthis latter company effectively signed the contract with CIEN.

 

H-6

----

 

2.      SIGNIFICANTACCOUNTING PRACTICES

 

a)      General

 

The financial statements of the Company have been prepared inaccordance with generally accepted accounting principles in Chile and theregulations established by the SVS (collectively “Chilean GAAP”), and thespecific corporate regulations of Law No. 18,046, related to theformation, registration and liquidation of Chilean corporations, among others.

 

The preparation of financial statements in conformity with Chilean GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, disclosures of contingent assets andliabilities as of the date of the financial statements, and the reportedamounts of revenues and expenses during the reporting year. Actual resultscould differ from those estimates.

 

Certain accountingpractices applied by the Company that conform to Chilean GAAP may not conformto generally accepted accounting principles in the United States of America (“USGAAP”).

 

For the convenience ofthe reader, these financial statements and their accompanying notes have beentranslated from Spanish to English.

 

b)      Accounting period

 

Thesefinancial statements present the financial position as of December 31, 2004 and2004 and the results of their operations and their cash-flows for the yearsended December 31, 2004, 2003, and 2002.

 

c)      Consolidation

 

Theaccompanying consolidated financial statements include the accounts of theCompany and its subsidiaries. All significant transactions and balances betweenthe companies have been eliminated in consolidation, as well as unrealizedincome arising from such transactions. The participation of minorityshareholders in subsidiaries has been reflected in the consolidated financialstatements under the caption Minority Interest.

 

Theconsolidated financial statements as of and for the years ended December 31,2004 and 2003 and 2002 include the following companies:

 
| ** **                                                           | ** ** | **Percentage owned** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------|------------|
| **Company**                                                          | ** ** | **2004**                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                           | ** ** | **%**                     | ** ** | **%** | ** ** | **%** | ** ** |
|                                                                 |       |                      |       |   |   |   |   |
| CTM – Compañía de Transmisión del Mercosur S.A.* |       | 99.99                     |       | 99.99 |   | — |   |
| TESA – Transportadora de Energía S.A.*                     |       | 100.00                    |       | 100.00 |   | — |   |

 

----

*These companies areconsolidated since January 1, 2003.

 

H-7

----

 

d)      Basis of conversion

 

d.1.       Purpose offinancial statements

 

Thesefinancial statements have been prepared in accordance with Technical BulletinNo. 64 established by the Chilean Association of Accountants .

 

TheCompany maintains its accounting records in Brazilian Reais, the currency ofthe country in which the Company is incorporated and operates, in accordance toaccounting practices adopted in Brazil.

 

Theassets and liabilities as of December 31, 2004 and 2003, and the income for theyears ended December 31, 2004, 2003 and 1002 have been translated from Reaisinto dollars using the translation methodology applicable to investments incountries with unstable currencies and are not considered an extension of theoperations of the investing Company, as described in Technical BulletinNo. 64, summarized as follows:

 

d.1.1.      Non monetary assets andliabilities

 

Non-monetaryassets and liabilities and shareholders’ equity are expressed in historic USdollars, translating the Reais of each transaction into US dollars, using thehistorical exchange rate in effect at the date of the transaction.

 

d.1.2.      Monetary assets andliabilities

 

Monetaryassets and liabilities have been translated into US dollars at the exchangerate prevailing at year end, applicable to remittances abroad.

 

Theexchange rate in effect as of December 31, 2004 was US$1 = R$2.6544 (US$1 =R$2.8892 in 2003).

 

d.1.3.      Incomestatement accounts

 

Theincome statement accounts – except for those that are determined at historicalamounts – were translated using the average monthly exchange rate.

 

Theresulting foreign currency translation is recorded in non-operating income(expense) in the income statement.

 

H-8

----

 

e)      Time deposits

 

Time deposits arecomprised of short-term funds and fixed income securities. These investmentsare stated at cost plus interest earned up to December 31, 2004 and 2003 and donot exceed market value.

 

f)       Investments

 

Investmentsin related parties in which the Company has significant influence or which arepart of our shareholders’ consolidated group are accounted for by the equitymethod. Other investments are presented at acquisition cost.

 

g)      Property, plant and equipment

 

Property, plant andequipment are recorded at cost of acquisition and/or construction, includingthe interest and financing related to financing the construction in progressduring the construction of the projects CIEN I and CIEN II.

 

Depreciation iscalculated by the straight-line method using rates defined by the BrazilianNational Agency of Electric Energy (ANEEL), which approximates the estimated usefullife of the assets used in the electric sector in Brazil.

 

h)      Government severance indemnity fund for employees

 

According to current labor legislation and contracts signedwith Company employees, there is no obligation related to benefit for years ofservice. UnderBrazilian labor legislation, the Company is required to make monthlycontributions of 8% on payroll expense to the Government though a financialinstitution, which can be withdrawn by the employee when upon dismissal fromthe Company or for purchasing a house.

 

i)       Liabilities with banks and financial institutions

 

Liabilities are adjustedfor monetary and exchange variation, plus accrued interest up to the balancesheet date.

 

j)       Income taxes

 

Incometax payables, including social tax contributions due, are recorded asliabilities, net of advances and other applicable credits.

 

Thecurrent income tax provision is calculated based on taxable income, at thecurrent statutory rates of 15% plus an additional 10% applied to the taxableincome exceeding R$240,000.00 per year.

 

Thesocial security contribution rate is 9% calculated of taxable income.

 

H-9

----

 

k)      Deferred income taxes

 

Inaccordance with the Technical Bulletin No. 60 from Chilean Association ofAccountants  and Circulars Nos. 1466 and1560 of the Superintendency of Securities and Insurance (“SVS”) of Chile, theCompany has recorded in the statements of income the effects of deferred incomeand social contribution taxes related to temporary differences, tax losscarryforwards and other events that generate differences between the book basisand tax values, in accordance with the rates in force in the estimated year ofits reversal.

 

l)       Accumulated deficit (development stage)

 

Representsexpenses incurred, net of the financial revenues, during the development stage,which ended June 21, 2000, related to the first transmission line constructionproject, which, in accordance with Chilean GAAP, are recognized directly as areduction of equity.

 

m)     Operating revenues

 

Revenueconsists of revenue billed for energy supplied, including energy supplied andunbilled at each year-end, valued at the selling price using the current rates,which has been included in revenue from operations. The unbilled amount ispresented in current assets as accounts receivable and the corresponding costis included in cost of operations.

 

***n)***      Provisionfor contingencies

*** ***

Provisionsfor loss contingencies are recorded using estimates by the Company’s managementbased on advice of external legal counsel to cover probable losses.

 

o)      Vacation accrual

 

TheCompany has recorded a vacation accrual incurred up to the balance sheet date,according to the Technical Bulletin No. 47 of Chilean Association ofAccountants.

 

p)      Cash flows

 

The statements of cash flows have been prepared using the indirectmethod.

 

Investments considered as cash equivalents, as indicated in point 6.2of Technical Bulletin No. 50 issued by the Chilean Association of Accountants,include time deposits and cash.

 

Forclassification purposes, cash flows from operations include collections fromclients and payments to suppliers, payroll costs and taxes.

 

H-10

----

 

q)      Restatement of financial statements as of and for theyear ended December 31, 2003

 

The following reclassifications were made in the balance sheet as ofDecember 31, 2003:

 

**Statementof balance sheets as of December 31, 2003**

 
| **From:**                                                        | ** ** | **ThUS$** | ** ** |
|------------------------------------------------------------------|------------|-----------|------------|
|                                                             |       |      |       |
| Due to banks and financial institutions – current portion   |       | (32,121   | )          |
| Trade recievables                                                |       | (28,747   | )          |
|                                                             |       |      |       |
| **To:**                                                          | ** ** | **ThUS$** | ** ** |
|                                                             |       |      |       |
| Due to banks and financial institutions – long-term portion |       | 32,121    |       |
| Long-term receivables                                            |       | 28,747    |       |

 

Asof December 31, 2003 the Company did not present its long-term receivables atpresent value and in consequence it overstated their value by ThUS$ 17,877. Theeffect of the restatement is presented below:

 
| ** **                                                  | ** ** | **Year ended  December 31,  2003** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                  | ** ** | **ThUS$**                                    | ** ** |
|                                                        |       |                                         |       |
| Operating  revenues reported                                |       | 295,914                                      |       |
| Effect of  discounting long-term receivables                |       | (17,877                                      | )          |
| Operating  revenues as adjusted                             |       | 278,037                                      |       |
|                                                        |       |                                         |       |
| Income taxes  previously reported                           |       | (58,550                                      | )          |
| Deferred tax  asset on discounting of long-term receivables |       | 6,078                                        |       |
| Income taxes as  adjusted                                   |       | (52,472                                      | )          |
| **Effect  on net income**                                   |       | (11,799                                      | )          |

 

3.       CHANGE IN ACCOUNTING PRINCIPLES

 

There were nochanges in accounting principles during the years ended December 31, 2004 and2003 that would affect the comparison with the prior year financial statements.

 

H-11

----

 

4.       SHORT-TERM FINANCIAL INVESTMENTS

 

The amountsrelated to short-term financial investments are as follows:

 
| **Financial institution** | ** ** | **Annual rate** | ** ** | **Instrument**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------|------------|----------------------|------------|-----------------------------------------|------------|----------|------------|----------|------------|
|                           |       |                 |       |                                    |       |     |       |     |       |
| Mellon Brascan  Bank           |       | -15.83% p.a.         |       | Variable Income Investment  Funds       |       | 29,771   |       | 15,936   |       |
| Banco Santander                |       | 18.64% p.a.          |       | Fixed Income Investment Funds           |       | 19,211   |       | 19,087   |       |
| Banco Santander                |       | 18.34% p.a.          |       | Certificate of Bank Deposit –  CDB |       | 4,595    |       | 2,923    |       |
| Bradesco                       |       | 18.21% p.a.          |       | Certificate of Bank Deposit –  CDB |       | 2,104    |       | 988      |       |
| Itaú Perfomace            |       | 18.46% p.a.          |       | Investment Funds                        |       | 12,336   |       | —   |       |
| Others                         |       |                 |       |                                    |       | 199      |       | 201      |       |
| Total                          |       |                 |       |                                    |       | 68,216   |       | 39,135   |       |

 

5.       TRADEACCOUNTS RECEIVABLE

 

The amountsrelated to trade accounts receivable are as follow:

 
| ** **                           | ** ** | **Undue and  overdue** | ** ** | **Overdue  from 90 days** | ** ** | ** **                | ** ** | ** **               | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                           | ** ** | **until 90 days** | ** ** | **to 1 year**             | ** ** | **Total short-term** | ** ** | **Total long-term** | ** ** |
| ** **                           | ** ** | **2004**                    | ** ** | **2003**                            | ** ** | **2004**                  | ** ** | **2003**                 | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                 |       |                        |       |                                |       |                      |       |                     |       |   |   | **Restated (Note 2q)** |   |   |   | **Restated (Note 2q)** |   |
| COPEL Distribuição S.A.    |       | 11,423                      |       | 28.747                              |       | —                    |       | —                   |       | 11,423 |   | 28,747 |   | 79,051 |   | 69,344 |   |
| Furnas Centrais  Elétricas S.A. |       | 16,506                      |       | 14,429                              |       | —                    |       | 877                      |       | 16,506 |   | 15,306 |   | — |   | — |   |
| Tractebel Energia S.A.               |       | 7,272                       |       | 6,244                               |       | 2,983                     |       | 2,940                    |       | 10,255 |   | 9,184 |   | — |   | — |   |
| Dona Francisca  Energética S.A. |       | —                      |       | 77                                  |       | 25                        |       | 23                       |       | 25 |   | 100 |   | — |   | — |   |
| Others                               |       | 1,594                       |       | 7,835                               |       | 203                       |       | 226                      |       | 1,797 |   | 8,061 |   | 5,379 |   | — |   |
| Total                                |       | 36,795                      |       | 57,332                              |       | 3,211                     |       | 4,066                    |       | 40,006 |   | 61,398 |   | 84,430 |   | 69,344 |   |

 

The year 2004 wascharacterized by changes in the legislation of Brazilian Electric sector and inthe tax legislation. The context was not favorable for the negotiation andsales of energy.

 

The amount of accountsreceivable from Furnas and Tractebel is net of provisions for losses amountingto US$ 6,874 and US$ 3,120, respectively, corresponding to the billing for thetransfer of transmission charges, which have not been paid.

 

On December 10, 2003, theCOPEL contracts were amended. The agreement provided that the outstandingbalances from 2002 and energy billed from January through May 2003 will bereceived in 60 monthly installments from December 31, 2003. The balance shownunder long-term receivables represents the present value of these receivables.

 

H-12

----

 

6.       MISCELLANEOUSRECEIVABLES

 

Miscellaneousreceivables are as follows:

 
| ** **                           | ** ** | **2004**   | ** ** | **2003** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|
|                                 |       |       |       |     |       |
| Dona Francisca  Energética S.A. |       | 483        |       | 557      |       |
| ABB Ltda.                            |       | 508        |       | 1,006    |       |
| Advances to  lawyers                 | ** ** | **—** |       | 798      |       |
| Advances to  personnel               |       | 21         |       | 21       |       |
| Other                                |       | 52         |       | 159      |       |
| Total                                |       | 1,064      |       | 2,541    |       |

 

7.       ACCOUNTSRECEIVABLE FROM AND PAYABLE TO RELATED PARTIES

 

The transactions andbalances detailed below correspond to entities that are subsidiaries ofEndesa-Spain, CIEN’s final parent company.

 
| ** **                                              | ** ** | **Assets**       | ** ** | **Statement  of income** | ** ** | ** **           | ** ** |
|---------------------------------------------------------|------------|------------------|------------|-------------------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **Short-  term** | ** ** | **Long-  term**               | ** ** | **Revenue  effects** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **2004**         | ** ** | **2004**                      | ** ** | **2004 (*)**    | ** ** | **Transactions** | ** ** |
|                                                    |       |             |       |                          |       |                 |       |   |   |
| CERJ – Cia. de Eletricidade do Rio de Janeiro S.A. |       | 13,730           |       | —                        |       | 89,032               |       | Energy supplies |   |
| COELCE – Cia. Energética do Ceará        |       | 2,916            |       | —                        |       | 14,185               |       | Energy supplies |   |
| CEMSA – Comercializadora del  Mercorsur S.A.       |       | 2,363            |       | —                        |       | 15,360               |       | Energy suplíes |   |
| Central Costanera S.A.                                  |       | 407              |       | —                        |       | 1,625                |       | Cost recovery |   |
| Ingendesa do Brasil Ltda.                               |       | 26               |       | —                        |       | —               |       | Rendering of services |   |
| Total                                                   |       | 19,442           |       | —                        |       | 120,202              |       |   |   |

 

----

(*) The column referred toas results includes US$ 5,613 corresponding to interest on bills issued toCerj, which were paid in arrears and are presented under financial income fromrelated parties.

 
| ** **                                              | ** ** | **Assets**       | ** ** | **Statement  of income** | ** ** | ** **           | ** ** |
|---------------------------------------------------------|------------|------------------|------------|-------------------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **Short-  term** | ** ** | **Long-  term**               | ** ** | **Revenue  effects** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **2003**         | ** ** | **2003**                      | ** ** | **2003**             | ** ** | **Transactions** | ** ** |
|                                                    |       |             |       |                          |       |                 |       |   |   |
| COELCE – Cia Energética do Cearé         |       | 4,475            |       | —                        |       | 23,536               |       | Energy suplies |   |
| CERJ – Cia. de Eletricidade do Rio de Janeiro S.A. |       | 21,347           |       | —                        |       | 61,780               |       | Energy suplies |   |
| CEMSA – Comercializadora del Mercorsur S.A.        |       | 258              |       | —                        |       | 40                   |       | Energy supplies |   |
| Ingendesa Brasil  Ltda.                                 |       | 23               |       | —                        |       | —               |       | Rendering of services |   |
| Central Generadora Termeléctrica Fortaleza.        |       | 130              |       | —                        |       | 129                  |       | Rendering of services |   |
| Total                                                   |       | 26,233           |       | —                        |       | 85,485               |       |   |   |

 

H-13

----

 
| ** **                                       | ** ** | **Liabilities** | ** ** | **Statement  of income** | ** ** | ** **                          | ** ** |
|--------------------------------------------------|------------|-----------------|------------|--------------------------|------------|-------------------------------------|------------|
| ** **                                       | ** ** | **Short-term**  | ** ** | **Long-term**            | ** ** | **Effect – charges** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **2004**        | ** ** | **2004**                 | ** ** | **2004**                            | ** ** | **Transactions** | ** ** |
|                                             |       |            |       |                     |       |                                |       |   |   |
| CEMSA – Comercializadora del Mercorsur S.A. |       | 8,367           |       | —                   |       | (81,623                             | )          | Energy supplies |   |
| Central  Costanera S.A.                          |       | 3,062           |       | —                   |       | (37,082                             | )          | Energy supplies |   |
| Endesa Internacional S.A.                        |       | 21,507          |       | 39,257                   |       | (2,890                              | )          | Financing |   |
| Other                                            |       | 596             |       | —                   |       | —                              |       | Provision |   |
| Total                                            |       | 33,532          |       | 39,257                   |       | (121,595                            | )          |   |   |

 
| ** **                                       | ** ** | **Liabilities** | ** ** | **Statement  of income** | ** ** | ** **                          | ** ** |
|--------------------------------------------------|------------|-----------------|------------|--------------------------|------------|-------------------------------------|------------|
| ** **                                       | ** ** | **Short-term**  | ** ** | **Long-term**            | ** ** | **Effect – charges** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **2003**        | ** ** | **2003**                 | ** ** | **2003**                            | ** ** | **Transactions** | ** ** |
|                                             |       |            |       |                     |       |                                |       |   |   |
| CEMSA – Comercializadora del Mercorsur S.A. |       | 25,555          |       | —                   |       | (87,948                             | )          | Energy supplies |   |
| Central Costanera S.A                       |       | 4,303           |       | —                   |       | (36,123                             | )          | Energy supplies |   |
| Ingendesa do Brasil Ltda.                        |       | 23              |       | —                   |       | (23                                 | )          | Provision |   |
| Endesa Internacional S.A.                        |       | 57,917          |       | —                   |       | (4,453                              | )          | Financing |   |
| Total                                            |       | 87,798          |       | —                   |       | (128,547                            | )          |   |   |

 

The accountpayable to Endesa International S.A. refers to a loan payable in US dollars,obtained to fund the acquisition of machinery and equipment and construction ofthe second transmission line. This transaction was carried out under marketconditions, at the annual average rate of 5.56%. The maturity date of said loans is May 30, 2012.

 

During the year 2004, US$39,257, corresponding to the loan obtained from Santander – Miga wasreclassified from current into noncurrent. It was transferred to EndesaInternacional, and the maturity date is 2011.

 

Transactions with relatedparties are carried out under market conditions applicable to similartransactions with third parties.

 

H-14

----

 

8.      RECOVERABLETAXES

 

Recoverable taxes payable as of December 31, 2004 and 2003are detailed as follows:

 
| ** **          | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Judicial deposits   |       | 4,733      |       | 3,721      |       |
| PIS (revenue tax)   |       | 1,901      |       | —     |       |
| Minimum tax         |       | —     |       | 4,528      |       |
| Total taxes payable |       | 6,634      |       | 8,249      |       |

 

9.      INCOMETAXES PAYABLE AND DEFERRED INCOME TAXES

 

a)       Taxespayable

 

Theincome tax and social contribution as of December 31, 2004 and 2003 are asfollows:

 
| ** **                                                    | ** ** | **2004**   | ** ** | **2003** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|----------|------------|
|                                                          |       |       |       |     |       |
| Income taxes                                                  |       | 17,299     |       | 18,078   |       |
| Social  contributions                                         |       | 5,859      |       | 5,863    |       |
| Tax for social  security financing (COFINS)                   |       | 5,912      |       | 4,492    |       |
| Social  integration program (PIS)                             | ** ** | **—** |       | 2,081    |       |
| Other                                                         |       | 218        |       | 50       |       |
| Referj (Río de  Janeiro State Tax Restructuring Program) |       | 4,306      |       | —   |       |
| Total                                                         |       | 33,594     |       | 30,564   |       |

 

b)      Deferred income tax

 

TechnicalBulletins Nos. 60 and 61 of the Chilean Association of Accountants establishedthat companies must record deferred income and social contribution taxesrelated to temporary differences, tax loss carryforwards and other events thatgenerate differences between the book basis and tax values of assets andliabilities. Additionally, Circular No. 1,466 of the Chilean SVS, requires that, companiesapply the aforementioned Technical Bulletins starting January 1, 2000.

 
| **Concept**                   | ** ** | **2004**   | ** ** | **2003**                         | ** ** |
|-------------------------------|------------|------------|------------|----------------------------------|------------|
| ** **                    | ** ** | ** ** | ** ** | **Restated (Note 2q)** | ** ** |
|                          |       |       |       |                             |       |
| Temporary  differences        |       |       |       |                             |       |
| Foreign currency  translation |       | 32,557     |       | 29,955                           |       |
| Provisions  (Drawback)        |       | (16,148    | )          | (14,881                          | )          |
| Other                         |       | (5,715     | )          | (6,078                           | )          |
| Total                         |       | 10,694     |       | 8,996                            |       |

 

H-15

----

 

The net deferred income taxas of December 31, 2004 was a liability of US$16,409 and as of December 31,2003 was an asset of US$15,074, resulted from deferred foreign exchangevariation and drawback provision, and they are recorded according to thecriteria established by the aforementioned Technical Bulletins.

 

The income taxexpense for 2004, 2003 and 2002 charged to the statement of income is detailedbelow:

 
| ** **                                                | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|----------|------------|----------|------------|
| ** **                                                | ** ** | **Restated (Note 2q)** | ** ** |
|                                                      |       |                             |       |     |       |     |       |
| Current income  and social contribution taxes             |       | (15,956                          | )          | (43,150  | )          | (6,039   | )          |
| Effects of  deferred income and social contribution taxes |       | (528                             | )          | (9,322   | )          | 6,598    |       |
| Total                                                     |       | (16,484                          | )          | (52,472  | )          | 559      |       |

 

H-16

----

 

10.     PROPERTY,PLANT AND EQUIPMENT

 

The amounts related toproperty, plant and equipment for the years ended December 31, 2003 and 2004are as follows:

 
| ** **                                         | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **Cost**                        | ** ** | **Accumulated  Depreciation** | ** ** | **Net** | ** ** |
|                                               |       |                            |       |   |   |   |   |
| Land                                               |       | 5,819                           |       | — |   | 5,819 |   |
|                                               |       |                            |       |   |   |   |   |
| Buildings and  constructions                       |       | 16,915                          |       | (1,654 | ) | 15,261 |   |
| Transmission  lines, machinery and equipment       |       | 544,130                         |       | (67,270 | ) | 476,860 |   |
| Total  transmission lines, machinery and equipment |       | 561,045                         |       | (68,924 | ) | 492,121 |   |
|                                               |       |                            |       |   |   |   |   |
| Construction in  progress                          |       | 9,999                           |       | — |   | 9,999 |   |
| Other property,  plant and equipment (Note 14)     |       | 60,965                          |       | (172 | ) | 60,793 |   |
| Total other                                        |       | 70,964                          |       | (172 | ) | 70,792 |   |
|                                               |       |                            |       |   |   |   |   |
| Total property,  plant and equipment               |       | 637,828                         |       | (69,096 | ) | 568,732 |   |

 
| ** **                                         | ** ** | **December 31, 2003** | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **Cost**                        | ** ** | **Accumulated  Depreciation** | ** ** | **Net** | ** ** |
|                                               |       |                            |       |   |   |   |   |
| Land                                               |       | 5,819                           |       | — |   | 5,819 |   |
|                                               |       |                            |       |   |   |   |   |
| Buildings and  constructions                       |       | 16,542                          |       | (907 | ) | 15,635 |   |
| Transmission  lines, machinery and equipment       |       | 544,220                         |       | (48,421 | ) | 495,799 |   |
| Total  transmission lines, machinery and equipment |       | 560,762                         |       | (49,328 | ) | 511,434 |   |
|                                               |       |                            |       |   |   |   |   |
| Construction in  progress                          |       | 10,148                          |       | — |   | 10,148 |   |
| Other property,  plant and equipment               |       | 72,198                          |       | (37 | ) | 72,161 |   |
| Total other                                        |       | 82,346                          |       | (37 | ) | 82,309 |   |
|                                               |       |                            |       |   |   |   |   |
| Total property,  plant and equipment               |       | 648,927                         |       | (49,365 | ) | 599,562 |   |

 

The depreciation expensesin 2004, 2003 and 2002, amounts to US$22,720, US$18,672 and US$11,737,respectively.

 

As of December 31, 2004,the Company’s insurance coverage contemplated significant risks such asproperty damage, loss of profits from property, plant and equipment, in amountsconsidered by Management sufficient to cover possible losses.

 

The Company’s principalproperty, plant and equipment consist of two transmission lines with anindividual length of 350 Km on the Brazilian side, and a transmission capacityof 1,050 MW each one, interconnecting Argentina’s power system and the networkin the South of Brazil. The lines started commercial operations in June 2000and August 2002, respectively.

 

H-17

----

 

11. OTHERASSETS

 

Other assets refer todeferred charges related to financing and loans in foreign currency, which arebeing amortized in accordance with the contract terms.

 
| ** **                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Short-term:                |       |     |       |     |       |
| Prepaid  financial charges |       |     |       |     |       |
| Agent  participation       |       | —   |       | 71       |       |
| Insurance  premiums        |       | 2,768    |       | 2,915    |       |
| Other                      |       | 1        |       | 37       |       |
| Total short-term           |       | 2,769    |       | 3,023    |       |
|                       |       |     |       |     |       |
| Long-term:                 |       |     |       |     |       |
| Prepaid  financial charges |       |     |       |     |       |
| Agent  participation       |       | 490      |       | 490      |       |
| Insurance  premiums        |       | 16,110   |       | 18,878   |       |
| Other                      |       | 2,255    |       | —   |       |
| Trust contract             |       | 16,973   |       | 5,976    |       |
| Total long-term            |       | 35,828   |       | 25,344   |       |

 

12.     LIABILITIESWITH BANKS AND FINANCIAL INSTITUTIONS

 

Correspond to local and foreigncurrency loans, as follows:

 
| ** **                            | ** ** | ** **   | ** ** | ** **    | ** ** | **December 31, 2004** | ** ** | ** **   | ** ** | ** **         | ** ** |
|---------------------------------------|------------|--------------|------------|---------------|------------|---------------------------------|------------|--------------|------------|--------------------|------------|
| ** **                            | ** ** | ** **   | ** ** | **Annual**    | ** ** | **Short-term**                  | ** ** | **Maturity** | ** ** | **Long term** | ** ** |
| **Creditor**                          | ** ** | **Currency** | ** ** | **Rates**     | ** ** | **Principal**                   | ** ** | **Interest** | ** ** | **Total**          | ** ** | **date** | ** ** | **principal** | ** ** |
|                                  |       |         |       |          |       |                            |       |         |       |               |       |   |   |   |   |
| Santander  Central Hispano – EKN |       | US$          |       | 7.79%         |       | 6,741                           |       | 336          |       | 7,077              |       | 03.11.2010 |   | 26,965 |   |
| BID – tranche A                  |       | US$          |       | 7.06%         |       | 4,456                           |       | 341          |       | 4,797              |       | 05.15.2013 |   | 33,409 |   |
| BID – tranche B                  |       | US$          |       | Libor + 1.25% |       | 17,078                          |       | 872          |       | 17,950             |       | 05.15.2011 |   | 93,928 |   |
| Santander  Central Hispano – KFW |       | US$          |       | 5.17%         |       | 14,607                          |       | 731          |       | 15,338             |       | 05.15.2012 |   | 94,952 |   |
| BID (Tesa)                            |       | US$          |       | Libor + 1.35% |       | 4,013                           |       | 152          |       | 4,165              |       | 15.05.2010 |   | 26,212 |   |
| Total                                 |       |         |       |          |       | 46,895                          |       | 2,432        |       | 49,327             |       |   |   | 275,466 |   |

 
| ** **                            | ** ** | ** **   | ** ** | ** **    | ** ** | **December 31, 2003 (Restated Note 2q)** | ** ** | ** **   | ** ** | ** **         | ** ** |
|---------------------------------------|------------|--------------|------------|---------------|------------|-------------------------------------------------------------------|------------|--------------|------------|--------------------|------------|
| ** **                            | ** ** | ** **   | ** ** | **Annual**    | ** ** | **Short-term**                                                    | ** ** | **Maturity** | ** ** | **Long term** | ** ** |
| **Creditor**                          | ** ** | **Currency** | ** ** | **Rates**     | ** ** | **Principal**                                                     | ** ** | **Interest** | ** ** | **Total**          | ** ** | **date** | ** ** | **principal** | ** ** |
|                                  |       |         |       |          |       |                                                              |       |         |       |               |       |   |   |   |   |
| Santander  Central Hispano – EKN |       | US$          |       | 7.79%         |       | 40,447                                                            |       | 385          |       | 40,832             |       | 03.11.2010 |   | — |   |
| BID – tranche A                  |       | US$          |       | 7.06%         |       | 42,318                                                            |       | 350          |       | 42,268             |       | 05.15.2013 |   | — |   |
| BID – tranche B                  |       | US$          |       | Libor + 1.25% |       | 128,310                                                           |       | 394          |       | 128,704            |       | 05.15.2011 |   | — |   |
| Santander Central Hispano – KFW  |       | US$          |       | 5.17%         |       | 124,168                                                           |       | 792          |       | 124,960            |       | 05.15.2012 |   | — |   |
| BID (Tesa)                            |       | US$          |       | Libor + 1.35% |       | 1,969                                                             |       | —       |       | 1,969              |       | 05.05.2010 |   | 32,121 |   |
| Total                                 |       |         |       |          |       | 337,212                                                           |       | 1,921        |       | 339,133            |       |   |   | 32,121 |   |

 

H-18

----

 

Financings in foreigncurrency were obtained for the construction of the transmission lines and theacquisition of the related equipment, and they are secured by the assetsthemselves and the amounts to be received during the project.

 

On July 28, 2003, theCompany received a notice from the representative of all banks stating thatcertain covenants were not being met. On December 31, 2003, the Companyreceived a waiver from said representative, which temporarily eliminated theCompany’s status of default, considering that certain conditions would have tobe met until May 2004 though.

 

In addition, the Companytook on a commitment, through which liabilities incurred during the normalcourse of operations should not exceed US$ 1 million. In May 2003, the Companycommunicated the banks’ representative that it was not complying with saidobligation and requested a waiver. Since there was not a formal pronouncementby the banks expressing that the Company was not in “default” with relation tothat obligation at December 31, 2003, the Company reclassified its debt withthe related banks from noncurrent to current, in the financial statements atDecember 31, 2003.

 

In June 2004, the banks’representative granted the waiver considering the maturity date in November2004.

 

It is noteworthy that thewaivers eliminated the Company’s status of default on a temporary basis (untilNovember 2004). In case the Company did not reestablish the contract conditionswithin the terms provided for in the waivers, Endesa International (guarantees)would have up to 12 months after the creditors’ notice (reestablishmentperiod), according to the contract, to arrange the status of default.

 

On December 22, 2004, theCompany and the creditors signed an amendment to the existing contract, withoutclauses related to financial covenants. Said contract will become effectivewhen all the conditions previously established between the parties (such as contractregistration at the Commercial Registry, for example) be met. Besides, theCompany obtained from its creditors a waiver valid until the date when the “effectivedate” is achieved, or March 31, 2005, whatever occurred first. The effectivedate occurred on March 16, 2005.

 

Due to the signature of theSecond Global Amendment Agreement with the new conditions and additionally dueto the achievement of the “effective date”, loans were reclassified again into non current in the financialstatements at December 31, 2004.

 

H-19

----

 

Main modifications of thenew contract, now denominated Second Global Amendment Agreement:

 

•      Currentstructure remains, with the commercial banks (SCH and CAI), KFW and BID aslenders;

•      Thecoverage of political risk of EKN (Swedish export agency) and the “BIDpolitical protection” remain.

•      Increasein the Guarantee, and the fist demand is changed from Endesa Internacional toEndesa S.A. (except for the Political Risk Insurance);

•      Eliminationof actual guarantees on the CIEN’s assets as long as Endesa’s guarantee iseffective;

•      Eliminationof a significant part of contract restrictions existing before projectmanagement, while Endesa’s guarantee is effective;

•      Decreasein the contract margins of loans.

 

The valuation of U.S.currency with relation to local currency for the year ended December 31, 2004was negative by 8.13% (in 2003 it was negative by 18.23%).

 

13.     ACCOUNTSPAYABLE

 

As of December 31,2004 and 2003, the amounts related to accounts payable are as follows:

 
| ** **                               | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Dona Francisca Energética S.A.      |       | 2,467    |       | 2,190    |       |
| Mercado Atacadista de Energia – MAE |       | 7,248    |       | 12,758   |       |
| Cost for using  transmission system      |       | 6,426    |       | 1,881    |       |
| ABB Ltda.                                |       | 2,874    |       | 8,131    |       |
| Petrobras Distribuidora                  |       | 1,694    |       | 2,282    |       |
| Others                                   |       | 1,738    |       | 240      |       |
| Total                                    |       | 22,447   |       | 27,482   |       |

 

H-20

----

 

14.     PROVISIONS

 
| ** **                   | ** ** | **2004**       | ** ** | **2003**      | ** ** |
|------------------------------|------------|----------------|------------|---------------|------------|
| ** **                   | ** ** | **Short-term** | ** ** | **Long-term** | ** ** | **Short-term** | ** ** | **Long-term** | ** ** |
|                         |       |           |       |          |       |   |   |   |   |
| Vacation accrual             |       | 237            |       | —        |       | 199 |   | — |   |
| Drawback  provision          |       | —         |       | 104,133       |       | — |   | 112,467 |   |
| Referj                       |       | —         |       | 34,197        |       | — |   | — |   |
| Provision for  contingencies |       | 3,222          |       | 3,799         |       | 1,395 |   | 4,054 |   |
| Total                        |       | 3,459          |       | 142,129       |       | 1,594 |   | 116,521 |   |

 

The Company has importedequipment for projects (phases CIEN I and CIEN II) based on a special taxincentive regime (drawback), which means that the Company is exempt from theImport Tax and IPI (excise tax). In addition, the Company obtained a suspensionof the ICMS tax levied by the state of Rio de Janeiro on imported equipment. Inspite of the above, the Foreign Trade Department (DECEX), in charge of the taxincentive, annulled the exemption for the Company’s importations after March31, 2001. CIEN obtained a court injunction and claimed an extension of theexemption until March 31, 2003 (awaiting the pronouncement of the foreign TradeSecretariat on the effects of the administrative action submitted by CIEN). Asthe court injunction was obtained, the drawback regime was considered asextended up to March 31, 2003. However, after the pronouncement of the ForeignTrade Secretariat, the judge declared the process as ended without examiningits merits.

 

Based on the opinion oflegal advisors and lawyers specialized in tax issues hired to provideassistance in this contingency, the Company has decided to accrue the taxesrestated as of December 31, 2004.

 

Since September 2004, theCompany has been subject to fiscal inspection by the Brazilian IRS, withrelation to the federal tax suspension. Said inspection established theeffectiveness of the tax payment for the imports ocurred, totaling R$ 187,494(US$ 70,635). In the opinion of the Company’s lawyers that decision isinadequate, and an appeal was filed. On January 14, 2004 the proceeding isstill at administrative level.

 

The suspended part of stateVAT (ICMS) was included in a tax debt renegotiation program with the Rio deJaneiro State Finance Office (REFERJ), amortizable during a period of 10 years(there are 9 years left as of December 31, 2004). The amount has already beenrestated considering the related fine and interest. The Company was subject tofiscal inspection in December 2004, by the State Finance Office that approvedthe due amount presented.

 

Based on the recentopinions of its legal counsel and taxes’ consultants, the Company decided toaccrual the taxes adjusted up to December 31, 2004 and 2003, as follows:

 
| ** **                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |
| Principal                     |       | 75,310   |       | 75,310   |       |
| Interest/monetary restatement |       | 28,823   |       | 37,157   |       |
| Total                         |       | 104,133  |       | 112,467  |       |

 

H-21

----

 

15.    SHAREHOLDERS’EQUITY

 
| ** **                                               | ** ** | **Paid-in  capital** | ** ** | **Accumulated  deficit -  (development  stage)** | ** ** | **Accumulated  deficit** | ** ** | **Net  income  for the  year** | ** ** | **Proposed  dividends** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|----------------------|------------|-------------------------------------------------------|------------|--------------------------|------------|-------------------------------------|------------|-------------------------|------------|-----------|------------|
|                                                     |       |                 |       |                                                  |       |                     |       |                                |       |                    |       |      |       |
| Balances at December 31, 2002                            |       | 194,633              |       | (24,648                                               | )          | (5,325                   | )          | —                              |       | —                  |       | 164,660   |       |
| Dividend distribution 2003                               |       | —               |       | —                                                |       | —                   |       | —                              |       | (1,106                  | )          | (1,106    | )          |
| Income for the year (Restated - Note 2 q)                |       | —               |       | —                                                |       | —                   |       | 29,896                              |       | —                  |       | 29,896    |       |
| Balances at December 31, 2003  (Restated – Note 2q) |       | 194,633              |       | (24,648                                               | )          | (5,325                   | )          | 29,896                              |       | (1,106                  | )          | 193,450   |       |
|                                                     |       |                 |       |                                                  |       |                     |       |                                |       |                    |       |      |       |
| Balances at December 31, 2003  (Restated - Note 2q)      |       | 194,633              |       | (24,648                                               | )          | (5,325                   | )          | 29,896                              |       | (1,106                  | )          | 193,450   |       |
| Profit distribution 2003                                 |       | —               |       | 24,648                                                |       | 4,142                    |       | (29,896                             | )          | 1,106                   |       | —    |       |
| Dividend distribution 2004                               |       | —               |       | —                                                |       | —                   |       | —                              |       | (20,324                 | )          | (20,324   | )          |
| Income for the year                                      |       | —               |       | —                                                |       | —                   |       | 26,398                              |       | —                  |       | 26,398    |       |
| Balances at December 31, 2004                            |       | 194,633              |       | —                                                |       | (1,183                   | )          | 26,398                              |       | (20,324                 | )          | 199,524   |       |

 

a)       Dividends

 

Preferred shareholders (registered preferred shares - PN) areentitled to fixed non-cumulative annual dividends of 10%, calculated on theamount of capital that they represent, whenever there is sufficient net incomeupon calculation of P&L for the year ended. Common shareholders (registeredcommon shares - ON), after the deductions provided for in article No. 24 ofBylaws, will also be entitled to dividends not lower than 25% of net incomeadjusted according to Law No. 6404/76 complemented by Law No. 10303/01, fromwhich the fixed dividends due to the preferred shareholders (PN) will bededucted.

 

b)      AccumulatedDeficit - development period

 
| ** **                                                      | ** ** | **Deficit of the ****development  period** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **Company**                                                     | ** ** | **2004**                                                  | ** ** | **2003** | ** ** |
| Branches:                                                       |       |                                                      |       |   |   |
| CTM - Compañía de Transmisión del  Mercosur S.A. | ** ** | **—**                                                |       | 2,661 |   |
| TESA - Transportadora de Energía S.A.                      | ** ** | **—**                                                |       | 5,715 |   |
| Total branches                                                  | ** ** | **—**                                                |       | 8,376 |   |
|                                                            |       |                                                      |       |   |   |
| CIEN - Companhia de Interconexão Energética           | ** ** | **—**                                                |       | 16,272 |   |
| Total deficit for the development period                        | ** ** | **—**                                                |       | 24,648 |   |

 

The amount of Accumulated Deficitfor the Development Period was totally transferred to the account RetainedEarnings for the year 2004.

 

H-22

----

 

16.    OTHERNON-OPERATING INCOME (EXPENSES)

 

Asof December 31, 2004 and 2003, the composition of other non-operating income(expenses) is as follows:

 
| ** **                                                                               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Other  non-operating revenues:                                                           |       |     |       |     |       |     |       |
| Test energy of 2000 invoiced in 2003                                                     |       | —   |       | 8,119    |       | —   |       |
| Income from sale of fixed assets                                                    |       | 70       |       | —   |       | —   |       |
| Reversal of unrealized provisions for expenses with assistance in  regulatory Issues     |       | 869      |       | —   |       | —   |       |
| Other                                                                                    |       | 60       |       | —   |       | 204      |       |
| Total                                                                                    |       | 999      |       | 8,119    |       | 204      |       |
|                                                                                     |       |     |       |     |       |     |       |
| Translation currency effect – Technical Bulletin No. 64                             |       | 457      |       | 23,627   |       | —   |       |
|                                                                                     |       |     |       |     |       |     |       |
| Total other non-operating revenues                                                       |       | 1,456    |       | 31,746   |       | 204      |       |
|                                                                                     |       |     |       |     |       |     |       |
| Other  non-operating expenses:                                                           |       |     |       |     |       |     |       |
| Bank expenses and fines                                                                  |       | (29,196  | )          | (44,474  | )          | (4.780   | )          |
| Commission over loans with related parties                                               |       | (3,534   | )          | (4,284   | )          | —   |       |
| Contribution over financial disbursing (CPMF) and other                                  |       | (4,702   | )          | (5,225   | )          | (4.211   | )          |
| Effects on MAE liquidations                                                              |       | —   |       | (1,326   | )          | —   |       |
| Adjustment for translation of property, plant and equipment into  historical U.S. dollar |       | —   |       | —   |       | (6.600   | )          |
| Other expenses                                                                           |       | (1,305   | )          | (2,017   | )          | —   |       |
| Total                                                                                    |       | (38,737  | )          | (57,326  | )          | (15,591  | )          |
|                                                                                     |       |     |       |     |       |     |       |
| Translation currency effects – Technical Bulletin No. 64                            |       | (4,993   | )          | —   |       | (25,459  | )          |
|                                                                                     |       |     |       |     |       |     |       |
| Total                                                                                    |       | (43,730  | )          | (57,326  | )          | (41,050  | )          |

 

17.     DERIVATIVES

 

During 2004, the Companydid not conduct operations with derivative contracts and as of December 31,2003, there are no financial derivatives.

 

18. CONTINGENCIES

 

The Company has recorded a provision forcontingencies amounting to US$145,351 in 2004 as described in Note 14(US$117,916 in 2003).

 

H-23

----

 

19.     GUARANTEES

 

Endesa S.A. guaranteesthe debt related to loans obtained, as described in Note 12, from BID and KFWas from the Second Global Amendment Effective Date, which must take placebefore March 31, 2005.

 

EndesaInternacional S.A., our parent company is the guarantor of the loans andfinancing obtained from the International Development Bank (IDB) and KFW, untilthe financial institutions notification (Note 12).

 

20.     LOCALAND FOREIGN CURRENCY

 

•    Assets:

 
| ** **                                | ** ** | **Currency**       | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| Current assets                            |       |               |       |     |       |     |       |
| Accounts  receivable from related parties |       | U.S. dollars       |       | 17,039   |       | 26,233   |       |
| Financial  charges paid in advance        |       | U.S. dollars       |       | 4,017    |       | 2,986    |       |
|                                      |       | Total U.S. dollars |       | 21,056   |       | 29,219   |       |
|                                      |       |               |       |     |       |     |       |
| Other                                     |       | Reais              |       | 152,406  |       | 121,914  |       |
| Total current  assets                     |       |               |       | 173,462  |       | 151,133  |       |
|                                      |       |               |       |     |       |     |       |
| Property, plant  and equipment            |       | Reais              |       | 498,052  |       | 522,313  |       |
| Other                                     |       | Arg$               |       | 70,680   |       | 77,249   |       |
|                                      |       |               |       | 568,732  |       | 599,562  |       |
| Other assets                              |       |               |       |     |       |     |       |
| Accounts payable  to related parties      |       | U.S. dollars       |       | 16,600   |       | —   |       |
| Financial  charges paid in advance        |       | U.S. dollars       |       | —   |       | 19,368   |       |
|                                      |       | Total U.S. dollars |       | 16,600   |       | 19,368   |       |
|                                      |       |               |       |     |       |     |       |
| Other                                     |       | Reais              |       | 79,212   |       | 75,320   |       |
|                                      |       | $ arg.        |       | 24,446   |       | —   |       |
| Total other  assets                       |       |               |       | 120,258  |       | 94, 688  |       |

 

H-24

----

 

•    Current liabilities:

 
| ** **                                         | ** ** | ** **          | ** ** | **2004**   | ** ** |
|----------------------------------------------------|------------|---------------------|------------|------------|------------|
| ** **                                         | ** ** | ** **          | ** ** | **Total**  | ** ** | **Until 90 days** | ** ** | **From 90 days  to 1 year** | ** ** |
| ** **                                         | ** ** | **Currency**        | ** ** | ** ** | ** ** | ** ** | ** ** | **Annual  rate** | ** ** | ** ** | ** ** | **Annual  rate** | ** ** |
| Current  liabilities                               |       |                |       |       |       |   |   |   |   |   |   |   |   |
| Liabilities with  banks and financial institutions |       | U.S. dollars        |       | 49,327     |       | — |   | — |   | 49,327 |   | 7.79 | % |
| Accounts payable  to related parties               |       | U.S. dollars        |       | 33,532     |       | 33,532 |   | — |   | — |   | — |   |
| Accounts payable                                   |       | U.S. dollars        |       | 22,447     |       | 22,447 |   | — |   | — |   | — |   |
|                                               |       | Total U.S.  dollars |       | 105,306    |       | 55,979 |   |   |   | 49,327 |   |   |   |
|                                               |       |                |       |       |       |   |   |   |   |   |   |   |   |
| Accounts payable                                   |       | Reais               |       | 86,836     |       | 68,538 |   |   |   | 18,298 |   |   |   |
| Other                                              |       | Arg$                |       | 3,240      |       | 3,240 |   |   |   | — |   |   |   |
|                                               |       | Total               |       | 90,076     |       | 71,778 |   |   |   | 18,298 |   |   |   |
|                                               |       |                |       |       |       |   |   |   |   |   |   |   |   |
| Total current  liabilities                         |       |                |       | 195,382    |       | 127,757 |   |   |   | 67,625 |   |   |   |
|                                               |       |                |       |       |       |   |   |   |   |   |   |   |   |
| ** **                                         | ** ** | ** **          | ** ** | **2003**   | ** ** |
| ** **                                         | ** ** | ** **          | ** ** | **Total**  | ** ** | **Until 90 days** | ** ** | **From 90 days  to 1 year** | ** ** |
| ** **                                         | ** ** | **Currency**        | ** ** | ** ** | ** ** | ** ** | ** ** | **Annual  rate** | ** ** | ** ** | ** ** | **Annual  rate** | ** ** |
| Current  liabilities                               |       |                |       |       |       |   |   |   |   |   |   |   |   |
| Liabilities with  banks and financial institutions |       | U.S. dollars        |       | 339,133    |       | — |   | 4.46 | % | 339,133 |   | 4.46 | % |
| Accounts payable  to related parties               |       | U.S. dollars        |       | 87,798     |       | 29,882 |   | 4.46 | % | 57,916 |   | 4.46 | % |
| Accounts payable                                   |       | U.S. dollars        |       | 7,405      |       | — |   | — |   | 7,405 |   | — |   |
|                                               |       | Total U.S.  dollars |       | 434,336    |       | 29,882 |   |   |   | 404,454 |   |   |   |
|                                               |       |                |       |       |       |   |   |   |   |   |   |   |   |
| Accounts payable                                   |       | Reais               |       | 20,077     |       | 20,077 |   |   |   | — |   |   |   |
| Other                                              |       | Reais               |       | 46,823     |       | 46,823 |   |   |   | — |   |   |   |
|                                               |       | Total Reais         |       | 66,900     |       | 66,900 |   |   |   | — |   |   |   |
|                                               |       |                |       |       |       |   |   |   |   |   |   |   |   |
| Total current  liabilities                         |       |                |       | 501,236    |       | 96,782 |   |   |   | 404,454 |   |   |   |

 

H-25

----

 

•    Non-current liabilities:

 
| ** **                                                           | ** ** | ** ** | ** ** | **2004**  | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|-----------|------------|
| ** **                                                           | ** ** | ** ** | ** ** | **Total** | ** ** | **From  1 to 3 years** | ** ** | **From  3 to 5 years** | ** ** | **From  5 to 10 years** | ** ** |
| Non-current  liabilities                                             |       |       |       |      |       |   |   |   |   |   |   |
| Liabilities with  banks and financial institutionsoans and financing |       | U.S Dollar |       | 275,466   |       | 88,980 |   | 59,320 |   | 127,166 |   |
| Provisions                                                           |       | Reais      |       | 142,129   |       | 23,233 |   | 118,896 |   | — |   |
| Deferred income  taxes                                               |       | Reais      |       | 10,694    |       | 10,694 |   | — |   | — |   |
| Accounts payable  to related parties                                 |       | U.S Dollar |       | 39,257    |       | 39,257 |   | — |   | — |   |
|                                                                 |       |       |       |      |       |   |   |   |   |   |   |
| Total non-current liabilities                                        |       |       |       | 467,546   |       | 162,164 |   | 178,216 |   | 127,166 |   |

 
| ** **                                         | ** ** | ** **  | ** ** | **2003 (Restated Note 2q)** | ** ** |
|----------------------------------------------------|------------|-------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | ** **  | ** ** | **Total**                                  | ** ** | **From  1 to 3 years** | ** ** | **From  3 to 5 years** | ** ** | **From  5 to 10 years** | ** ** |
| Non-current  liabilities                           |       |        |       |                                       |       |   |   |   |   |   |   |
| Liabilities with  banks and financial institutions |       | U.S Dollar  |       | 32,121                                     |       | 32,121 |   |   |   |   |   |
| Provisions                                         |       | Reais       |       | 116,521                                    |       | 4,054 |   | 112,467 |   | — |   |
|                                               |       | Total Reais |       | 116,521                                    |       | 4,054 |   | 112,467 |   | — |   |
| Deferred income  taxes                             |       | Reais       |       | 8,996                                      |       | — |   | 8,996 |   | — |   |
|                                               |       |        |       |                                       |       |   |   |   |   |   |   |
| Total non-current liabilities                      |       |        |       | 157,638                                    |       | 36,175 |   | 121,463 |   | — |   |

 

H-26

----

 

21. SANCTIONS

 

As of December 31, 2004and 2003, there are no sanctions against the Company or its directors ormanagers.

 

22.     SUBSEQUENTEVENTS

 

Management is not awareof any significant subsequent events that have occurred after    December 31, 2004 and that may affect theCompany’s financial position or the interpretation of these financialstatements.

 

23.     ENVIRONMENT (UNAUDITED)

 

We may highlight as a relevant issue regarding environmentalpolicy for 2004 the following:

 

Approval of the Company’s Environmental Policy, by the Boardof Directors and the Committee on Environment and Sustainable Development, aswell as the implementation of the System of Environmental Management (SGA),aiming at its validation by ISO standard No. 14001 in 2005.

 

H-27

----

 

24.           PRINCIPAL DIFFERENCES BETWEEN CHILEAN GAAP AND US GAAP

 

ChileanGAAP varies in certain important respects from U.S. GAAP. Such differencesinvolve certain methods for measuring the amounts shown in the financialstatements.

 

Differences inMeasurement Methods

 

The principaldifferences between Chilean GAAP and U.S. GAAP are described below togetherwith an explanation, where appropriate, of the method used in the determinationof the adjustments that affect net income and total stockholders’ equity.References below to “SFAS” are to Statements of Financial Accounting Standardsissued by the Financial Accounting Standards Board in the United States.

 

The effects of these differences on the Company’s shareholders’ equity asof December 31, 2004 and 2003 and net income for the years then ended aresummarized below:

 
| ** **                                             | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | **2004**                                    | ** ** | **2003  Restated  (Note 2q)** | ** ** | **2002** | ** ** |
| ** **                                             | ** ** | **ThUS$**                                   | ** ** | **ThUS$** | ** ** | **ThUS$** | ** ** |
| **Net  income (loss) in accordance with Chilean GAAP** |       | 26,398                                      |       | 29,896 |   | 22,360 |   |
| Accounting for  derivative instruments (a)             |       | (124,599                                    | )          | 150,208 |   | 6,712 |   |
| Capitalization  of interest on financing (b)           |       | 58                                          |       | 57 |   | 7,091 |   |
| Tax effects on GAAP differences (c)                    |       | 42,344                                      |       | (51,090 | ) | 2,127 |   |
| Deferred tax on  losses carryforwards (d)              |       | —                                      |       | — |   | 13,189 |   |
| Accumulated deficit development stage (e)              |       | —                                      |       | — |   | (6,027 | ) |
| **Net  income (loss) in accordance with US GAAP**      |       | (55,799                                     | )          | 129,071 |   | 45,452 |   |

 
| ** **                                                     | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                              | ** ** | **2003  Restated  (Note 2q)** | ** ** |
| ** **                                                     | ** ** | **ThUS$**                             | ** ** | **ThUS$** | ** ** |
|                                                           |       |                                  |       |   |   |
| **Shareholders’  equity in accordance with Chilean GAAP** |       | 199,524                               |       | 193,450 |   |
| Accounting for  derivative instruments (a)                     |       | (43,476                               | )          | 81,123 |   |
| Capitalization  of interest on financing (b)                   |       | (1,072                                | )          | (1,130 | ) |
| Tax effects on GAAP differences (c)                            |       | 15,146                                |       | (27,198 | ) |
| **Shareholders’  equity in accordance with US GAAP**      |       | 170,122                               |       | 246,245 |   |

 

H-28

----

 

UnderChilean GAAP, in accordance with Technical Bulletin 64 (“B.T. 64”) thefinancial statements of foreign subsidiaries that operate in countries exposedto significant risks (“unstable” countries), and that are not considered to bean extension of the parent company’s operations, are remeasured into US dollars.The Company and its foreign subsidiaries in Argentina all meet the criteria offoreign subsidiaries that operate in countries exposed to significant risksunder BT 64, and are remeasured into US dollars.

 

•      Monetary assets andliabilities are translated at year-end rates of exchange between the US dollarand the local currency,

•      All non-monetary assets andliabilities and shareholder’s equity are translated at historical rates ofexchange between the US dollar and the local currency,

•      Income and expense accountsare translated at average rates of exchange between the US dollar and localcurrency.

•      The effects of any exchangerate fluctuations between the local currency and the US dollar are included inthe results of operations for the period.

 

As discussed in Note 2c the foreign exchange currency translationprocedures defined by Technical Bulletin 64 are part of the comprehensive basisof preparation of price-level adjusted financial statements required by ChileanGAAP. Inclusion of inflation if applicable and translation effects in thefinancial statements is considered appropriate under the inflationaryconditions that have historically affected the Chilean economy, andaccordingly, are not eliminated in the reconciliation to U.S. GAAP as permittedby Item 17 c (iv) of Form 20-F.

 

a.             Accounting for derivative instruments

 

CurrentChilean accounting rules do not consider the existence of derivativeinstruments embedded in other contracts or the consideration of non-financialinstrument contracts as derivatives and therefore they are not reflected in thefinancial statements.

 

CertainCompany’s generation and distribution commodity contracts could be seen ascontracts that meet the definition of a derivative under SFAS No. 133 and wouldbe required to be accounted for at fair value. These conditions are (i) have anunderlying, which is the market price of power at the delivery location and anotional amount specified in the contract; (ii) have no initial payment onentering into the contract; and (iii) have a net settlement provision or havethe characteristic of net settlement because power is readily convertible tocash, as it is both fungible and actively traded in the country of generationor country of distribution.

 

TheCompany assessed that its commodity contracts that are requirements contractsdo no meet the above definition because the contracts do not have notionalamounts, as they only have maximum amounts or no specified amounts, and do notinclude an implicit or explicit minimum amount in a settlement or a defaultclause. A requirements contract allows the purchaser to use as many units ofpower as required to satisfy its actual needs for power during the period ofthe contract, and the party is not permitted to buy more than its actual needs.

 

H-29

----

 

TheCompany concluded that all of its power is readily convertible to cash asenergy is actively traded, or the Company has access, to markets where energyis actively traded. However, only certain participants have access to theenergy markets, thus determination as to whether energy could be consideredreadily convertible to cash was analyzed on a country by country basis. TheCompany has also concluded that multiple-delivery long-term power contractsmeet the net settlement characteristic. Management believes that multiple-deliverylong-term power contracts are readily convertible to cash because the Companyoperates in countries with active spot markets, that although they containvarying levels of liquidity, can rapidly absorb the contract’s quantities ateach delivery date without significantly affecting the price, and thus meet thedefinition of net settlement, consequently these contracts are accounted for asderivatives that under SFAS No.133.

 

Becauseboth the purchases and sales interconnection contracts are for periods up to 20years in complex markets, where no similar term forward market information isavailable, the Company has estimated such values based on the best informationavailable, including using modeling and other valuation techniques. The Companyhas recorded the best estimate of fair value, however with differentassumptions such as interest rates, inflation rates, exchange rates,electricity rates, and increases in cost trends, materially different fairvalues could result. As a result such estimates are highly volatile and dependentupon the assumptions used.

 

b.            Capitalization of interest on financing

 

Intereston loans and financing of work in progress was accounted for in fixed assetsduring the construction of projects CIEN I and CIEN II. For US GAAP theinterest capitalized in excess of amounts qualified for interest capitalizationwas reversed in accordance with Statement of Financial Accounting Standards No.34 (SFAS 34).

 

TheChilean GAAP determines that the totality of the interest on loans andfinancing of fixed assets acquisition or construction has to be accounted forin fixed assets. As determined in SFAS 34, the amount capitalized in anaccounting period shall be determined by applying an interest rate to theaverage amount of accumulated expenditures for the asset during the period.

 

c.             Tax effects on GAAP differences

 

Refers to effectsof income and social contribution taxes on the Chilean to US GAAP differences.

 

d.            Deferred tax onlosses carryforwards

 

In 2001 theCompany recorded a valuation allowance for deferred taxes on lossescarryforwards for US GAAP, which was reversed in 2002.

 

e.             Accumulated deficit during thedevelopment stage

 

Under ChileanGAAP, the losses incurred during the development stage is recorded directly inthe parent company’s equity. Under US GAAP, such costs must be charged toincome as incurred.

 

H-30

----

 

 

**Financial statements as ofDecember 31, 2004 and 2005, and for the three years in the period endedDecember 31, 2005**

 

----

 

 

 
| Deloitte & Co. S.R.L.   |
|-----------------------------|
| Florida  234 - Piso 5° |
| Buenos  Aires C1005AAF      |
| Argentina

            |
| Tel:  (54) 11-4320-2700     |
| Fax:  (54) 11-4320-8081     |
| www.deloitte.com            |

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the President and Board of Directors of

**Comercializadora de Energía delMercosur S.A. (CEMSA)**

 

We have audited the consolidated balancesheets of Comercializadora de Energía del Mercosur S.A. (CEMSA) (the “Company”)as of December 31, 2004 and 2005 and the consolidated statements of operationsand cash flows for each of the three years in the period ended December 31,2005. These financial statements are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, such financial statementspresent fairly, in all material respects, the financial position ofComercializadora de Energía del Mercosur S.A. (CEMSA) as of December 31, 2004and 2005, and the results of their operations and their cash flows for each ofthe three years in the period ended December 31, 2005 in conformity withaccounting principles generally accepted in Chile.

 

Accounting principles generally accepted inChile vary in certain significant respects from accounting principles generallyaccepted in the United States of America. The application of the latter would haveaffected the determination of net income for each of the three years in theperiod ended December 31, 2005 and the determination of shareholders’ equity atDecember 31, 2004 and 2005, to the extent summarized in Note 16.

 

**DELOITTE & Co. S.R.L.**

 
| /s/ Carlos A. Lloveras            |
|-----------------------------------|
| **Carlos A. Lloveras**            |
| (Partner)                         |
| Buenos Aires, February 21,  2006. |

 

*Deloitte refers to one or more ofDeloitte Touche Tohmatsu, a Swiss Verein, its member firms, and theirrespective subsidiaries and affiliates. As a Swiss Verein (association),neither Deloitte Touche Tohmatsu nor any of its member firms has any liabilityfor each other’s acts or omissions. Each of the member firms is a separate andindependent legal entity operating under the names “Deloitte,” “Deloitte &Touche,” “Deloitte Touche Tohmatsu,” or other related names. Services areprovided by the member firms or their subsidiaries or affiliates and not by theDeloitte Touche Tohmatsu Verein.*

 

 

 

H-31

----

 

**COMERCIALIZADORA DE ENERGIA DELMERCOSUR S.A.**

**BALANCE SHEETS**

 

(Restatedfor general price-level changes and expressed in thousands of constant

Chileanpesos as of December 31, 2005 and thousands of US dollars)

 
| ** **                                          | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|
| ** **                                          | ** ** | **2004**               | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **ThCh$**              | ** ** | **ThCh$** | ** ** | **ThUS$** | ** ** |
| **ASSETS**                                          | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| CURRENT ASSETS:                                     |       |                   |       |   |   |   |   |
| Cash                                                |       | 5,576,532              |       | 2,554,106 |   | 4,984 |   |
| Time deposits                                       |       | 46,541                 |       | 3,365,670 |   | 6,567 |   |
| Accounts receivable, net                            |       | 1,230,314              |       | 1,821,968 |   | 3,555 |   |
| Amounts due from related companies (note  5.a)      |       | 4,667,558              |       | 14,958,633 |   | 29,188 |   |
| Income taxes and V.A.T. recoverable                 |       | 3,352,352              |       | 2,689,598 |   | 5,248 |   |
| Deferred income tax (note 8.b)                      |       | —                 |       | 484,976 |   | 946 |   |
| Other current assets (note 6)                       |       | 4,092,570              |       | 1,885,572 |   | 3,679 |   |
| Total current assets                                |       | 18,965,867             |       | 27,760,523 |   | 54,167 |   |
|                                                |       |                   |       |   |   |   |   |
| NON CURRENT ASSETS:                                 |       |                   |       |   |   |   |   |
| Other non current assets                            |       | —                 |       | 31,077 |   | 61 |   |
| Total non current assets                            |       | —                 |       | 31,077 |   | 61 |   |
|                                                |       |                   |       |   |   |   |   |
| PROPERTY, PLANT AND EQUIPMENT:                      |       |                   |       |   |   |   |   |
| Equipment and others (note 7)                       |       | 311,081                |       | 284,015 |   | 554 |   |
| Accumulated depreciation (note 7)                   |       | (170,998               | )          | (199,216 | ) | (389 | ) |
| Total property, plant and equipment, net            |       | 140,083                |       | 84,799 |   | 165 |   |
| **TOTAL ASSETS**                                    | ** ** | **19,105,950**         | ** ** | **27,876,399** | ** ** | **54,393** | ** ** |
|                                                |       |                   |       |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**       | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| CURRENT LIABILITIES:                                |       |                   |       |   |   |   |   |
| Accounts payable                                    |       | 4,361,549              |       | 7,587,958 |   | 14,806 |   |
| Amounts payable to related companies (note  5.b)    |       | 4,828,277              |       | 9,163,345 |   | 17,880 |   |
| Withholdings                                        |       | 108,081                |       | 16,639 |   | 32 |   |
| Income taxes payable (note 8.a)                     |       | 764,310                |       | 415,491 |   | 810 |   |
| Other current liabilities (note 9)                  |       | 148,581                |       | 2,700,249 |   | 5,270 |   |
| Total current liabilities                           |       | 10,210,798             |       | 19,883,682 |   | 38,798 |   |
|                                                |       |                   |       |   |   |   |   |
| NON-CURRENT LIABILITIES:                            |       |                   |       |   |   |   |   |
| Deferred income tax (note 8.b)                      |       | 64,999                 |       | 45,264 |   | 88 |   |
| Total non-current liabilities                       |       | 64,999                 |       | 45,264 |   | 88 |   |
|                                                |       |                   |       |   |   |   |   |
| SHAREHOLDERS’ EQUITY:                          |       |                   |       |   |   |   |   |
| Paid-in capital                                     |       | 8,091,459              |       | 7,181,150 |   | 14,012 |   |
| Other reserves                                      |       | 32,378                 |       | 28,736 |   | 56 |   |
| (Accumulated deficit) Retained earnings             |       | (627,122               | )          | 626,853 |   | 1,223 |   |
| Net income for the year                             |       | 1,333,438              |       | 110,714 |   | 216 |   |
| Total shareholders’ equity                     |       | 8,830,153              |       | 7,947,453 |   | 15,507 |   |
| **TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY** | ** ** | **19,105,950**         | ** ** | **27,876,399** | ** ** | **54,393** | ** ** |

 

The accompanying notes are an integral part of these financial statements.

 

H-32

----

 

**COMERCIALIZADORA DE ENERGIA DELMERCOSUR S.A.**

**STATEMENTS OF INCOME**

 

(Restatedfor general price-level changes and expressed in thousands of constant

Chileanpesos as of December 31, 2005 and thousands of US dollars)

** **
| ** **                               | ** ** | **As of December 31,** | ** ** |
|------------------------------------------|------------|------------------------|------------|
| ** **                               | ** ** | **2003**               | ** ** | **2004** | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **ThCh$**              | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThUS$** | ** ** |
| OPERATING INCOME:                        |       |                   |       |   |   |   |   |   |   |
| SALES                                    |       | 5,887,656              |       | 12,648,907 |   | 1,387,791 |   | 2,708 |   |
|                                     |       |                   |       |   |   |   |   |   |   |
| COST OF SALES                            |       | (2,158,283             | )          | (8,739,117 | ) | — |   | — |   |
|                                     |       |                   |       |   |   |   |   |   |   |
| GROSS MARGIN                             |       | 3,729,373              |       | 3,909,790 |   | 1,387,791 |   | 2,708 |   |
|                                     |       |                   |       |   |   |   |   |   |   |
| ADMINISTRATIVE AND SELLING EXPENSES      |       | (1,158,787             | )          | (2,274,903 | ) | (1,808,880 | ) | (3,529 | ) |
|                                     |       |                   |       |   |   |   |   |   |   |
| OPERATING INCOME (LOSS)                  |       | 2,570,586              |       | 1,634,887 |   | (421,089 | ) | (821 | ) |
|                                     |       |                   |       |   |   |   |   |   |   |
| NON-OPERATING INCOME AND EXPENSES:       |       |                   |       |   |   |   |   |   |   |
| Interest income                          |       | —                 |       | — |   | 197,710 |   | 386 |   |
| Other non-operating income (note 11.a)   |       | 232,201                |       | 606,308 |   | 250,777 |   | 488 |   |
| Interest expense                         |       | (294,350               | )          | (24,487 | ) | (22 | ) | — |   |
| Other non-operating expenses (note 11.b) |       | (8,387                 | )          | (48,136 | ) | — |   | — |   |
|                                     |       |                   |       |   |   |   |   |   |   |
| NON-OPERATING INCOME (EXPENSE), NET      |       | (70,536                | )          | 533,685 |   | 448,465 |   | 874 |   |
|                                     |       |                   |       |   |   |   |   |   |   |
| INCOME BEFORE INCOME TAXES               |       | 2,500,050              |       | 2,168,572 |   | 27,376 |   | 53 |   |
|                                     |       |                   |       |   |   |   |   |   |   |
| INCOME TAXES                             |       | (1,061,327             | )          | (835,134 | ) | 83,338 |   | 163 |   |
|                                     |       |                   |       |   |   |   |   |   |   |
| **NET INCOME FOR THE YEAR**              | ** ** | **1,438,723**          | ** ** | **1,333,438** | ** ** | **110,714** | ** ** | **216** | ** ** |

 

The accompanying notes are an integral part of these financialstatements.

 

H-33

----

 

**COMERCIALIZADORA DE ENERGIA DELMERCOSUR S.A.**

**STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**

 

(Restatedfor general price-level changes and expressed in thousands of constant

Chileanpesos as of December 31, 2005 and thousands of US dollars)

 
| ** **                                            | ** ** | **Paid-in  Capital** | ** ** | **Other  Reserves** | ** ** | **Retained  earnings/  (Accumulated  deficit)** | ** ** | **Net  income  (loss) for  the year** | ** ** | **Total**     | ** ** |
|-------------------------------------------------------|------------|----------------------|------------|---------------------|------------|-------------------------------------------------|------------|---------------------------------------|------------|---------------|------------|
| ** **                                            | ** ** | **ThCh$**            | ** ** | **ThCh$**           | ** ** | **ThCh$**                                       | ** ** | **ThCh$**                             | ** ** | **ThCh$**     | ** ** |
|                                                  |       |                 |       |                |       |                                            |       |                                  |       |          |       |
| As of January 1, 2003                                 |       | 10,069,163           |       | 46,079              |       | 886,783                                         |       | (3,387,990                            | )          | 7,614,035     |       |
| Transfer of prior year loss to accumulated  deficit   |       | —               |       | —              |       | (3,387,990                                      | )          | 3,387,990                             |       | —        |       |
| Cumulative translation adjustment under  Chilean GAAP |       | (1,748,837           | )          | (8,005              | )          | 495,876                                         |       | —                                |       | (1,260,966    | )          |
| Net income for the year                               |       | —               |       | —              |       | —                                          |       | 1,355,690                             |       | 1,355,690     |       |
| **As of December 31, 2003**                           | ** ** | **8,320,326**        | ** ** | **38,074**          | ** ** | **(2,005,331**                                  | **)**      | **1,355,690**                         | ** ** | **7,708,759** | ** ** |
| As of December 31, 2003 (1)                           |       | 8,829,935            |       | 40,407              |       | (2,128,155                                      | )          | 1,438,723                             |       | 8,180,910     |       |
|                                                  |       |                 |       |                |       |                                            |       |                                  |       |          |       |
| As of January 1, 2004                                 |       | 8,320,326            |       | 38,074              |       | (2,005,331                                      | )          | 1,355,690                             |       | 7,708,759     |       |
| Transfer of prior year income to  accumulated deficit |       | —               |       | —              |       | 1,355,690                                       |       | (1,355,690                            | )          | —        |       |
| Cumulative translation adjustment under  Chilean GAAP |       | (510,037             | )          | (6,821              | )          | 44,310                                          |       | —                                |       | (472,548      | )          |
| Net income for the year                               |       | —               |       | —              |       | —                                          |       | 1,287,102                             |       | 1,287,102     |       |
| **As of December 31, 2004**                           | ** ** | **7,810,289**        | ** ** | **31,253**          | ** ** | **(605,331**                                    | **)**      | **1,287,102**                         | ** ** | **8,523,313** | ** ** |
| As of December 31, 2004 (1)                           |       | 8,091,459            |       | 32,378              |       | (627,122                                        | )          | 1,333,438                             |       | 8,830,153     |       |
|                                                  |       |                 |       |                |       |                                            |       |                                  |       |          |       |
| As of January 1, 2005                                 |       | 7,810,289            |       | 31,253              |       | (605,331                                        | )          | 1,287,102                             |       | 8,523,313     |       |
| Transfer of prior year income to  accumulated deficit |       | —               |       | —              |       | 1,287,102                                       |       | (1,287,102                            | )          | —        |       |
| Cumulative translation adjustment under  Chilean GAAP |       | (629,139             | )          | (2,517              | )          | (54,918                                         | )          | —                                |       | (686,574      | )          |
| Net income for the year                               |       | —               |       | —              |       | —                                          |       | 110,714                               |       | 110,714       |       |
| **As of December 31, 2005**                           | ** ** | **7,181,150**        | ** ** | **28,736**          | ** ** | **626,853**                                     | ** ** | **110,714**                           | ** ** | **7,947,453** | ** ** |
| **As of December 31, 2005 (2)**                       | ** ** | **14,012**           | ** ** | **56**              | ** ** | **1,223**                                       | ** ** | **216**                               | ** ** | **15,507**    | ** ** |

 

----

(1) Restated in thousands of constantChilean pesos as of December 31, 2005.

(2) Presented in thousands of US$ at theexchange rate as of December 31, 2005 of Ch$512.50 for US$1

 

The accompanying notes are an integral partof these financial statements

 

H-34

----

 

**COMERCIALIZADORA DE ENERGIA DELMERCOSUR S.A.**

**STATEMENTS OF CASH FLOWS**

 

(Restatedfor general price-level changes and expressed in thousands of constant

Chileanpesos as of December 31, 2005 and thousands of US dollars)

 
| ** **                                                                  | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | **2003**               | ** ** | **2004** | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                                                  | ** ** | **ThCh$**              | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThUS$** | ** ** |
|                                                                        |       |                   |       |   |   |   |   |   |   |
| Net income for the year                                                     |       | 1,438,723              |       | 1,333,438 |   | 110,714 |   | 216 |   |
|                                                                        |       |                   |       |   |   |   |   |   |   |
| Charges (credits) to income which do not  represent cash flows:             |       |                   |       |   |   |   |   |   |   |
| Depreciation                                                                |       | 55,507                 |       | 54,499 |   | 47,456 |   | 93 |   |
| Income taxes                                                                |       | 1,061,327              |       | 835,134 |   | (83,338 | ) | (163 | ) |
| Allowance for doubtful accounts                                             |       |                   |       |   |   | 1,396,442 |   | 2,725 |   |
| Other (gains) losses that do not affect  cash flows                         |       | (1,101,489             | )          | (329,002 | ) | (977,654 | ) | (1,908 | ) |
|                                                                        |       |                   |       |   |   |   |   |   |   |
| Changes in assets which affect cash flows:                                  |       |                   |       |   |   |   |   |   |   |
| Decrease (increase) in trade receivables                                    |       | 570,835                |       | (847,016 | ) | (591,654 | ) | (1,154 | ) |
| (Increase) decrease in due from related  companies                          |       | (9,311,210             | )          | 10,808,622 |   | (10,291,075 | ) | (20,080 | ) |
| Decrease (increase) in other assets                                         |       | 1,056,525              |       | (2,118,305 | ) | 2,482,302 |   | 3,829 |   |
|                                                                        |       |                   |       |   |   |   |   |   |   |
| Changes in liabilities which affect cash  flows:                            |       |                   |       |   |   |   |   |   |   |
| Increases (decrease) in accounts payable  associated with operating results |       | 7,169,098              |       | (9,242,297 | ) | 6,073,591 |   | 12,518 |   |
| Increase (decrease) in income tax payable                                   |       |                   |       | 64,999 |   | (348,819 | ) | (681 | ) |
| Increase (decrease) in other accounts  payable                              |       | (1,565,179             | )          | (112,841 | ) | 2,486,669 |   | 4,185 |   |
|                                                                        |       |                   |       |   |   |   |   |   |   |
| Net cash flows provided by (used in)  operating activities                  |       | (625,863               | )          | 447,231 |   | 304,634 |   | (420 | ) |
|                                                                        |       |                   |       |   |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                       |       |                   |       |   |   |   |   |   |   |
| Additions to property, plant and equipment                                  |       | (117,875               | )          | (21,818 | ) | (7,932 | ) | (15 | ) |
|                                                                        |       |                   |       |   |   |   |   |   |   |
| Net cash used in investing activities                                       |       | (117,875               | )          | (21,818 | ) | (7,932 | ) | (15 | ) |
|                                                                        |       |                   |       |   |   |   |   |   |   |
| POSITIVE (NEGATIVE) NET CASH FLOW FOR THE  YEAR                             |       | (743,738               | )          | 425,413 |   | 296,702 |   | (435 | ) |
|                                                                        |       |                   |       |   |   |   |   |   |   |
| EFFECT OF PRICE-LEVEL RESTATEMENT ON CASH  AND CASH EQUIVALENTS             |       | (1,349,253             | )          | (339,424 | ) | 632,610 |   | 1,234 |   |
|                                                                        |       |                   |       |   |   |   |   |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                       |       | (2,092,991             | )          | 85,989 |   | 929,312 |   | 799 |   |
|                                                                        |       |                   |       |   |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  YEAR                             |       | 7,768,505              |       | 5,537,084 |   | 4,990,464 |   | 9,737 |   |
|                                                                        |       |                   |       |   |   |   |   |   |   |
| **CASH AND CASH EQUIVALENTS AT END OF YEAR**                                | ** ** | **5,675,514**          | ** ** | **5,623,073** | ** ** | **5,919,776** | ** ** | **10,536** | ** ** |

 

The accompanying notes are an integral part of these financialstatements.

 

H-35

----

 

**COMERCIALIZADORADE ENERGIA DEL MERCOSUR S.A.**

**NOTES TO THE FINANCIAL STATEMENTS**

 

Asof and for the years ended December 31, 2005 and 2004

 

(Restatedfor general price-level changes and expressed in thousands of constant

Chileanpesos as of December 31, 2005)

 

**Note 1.**                            Description of Business

 

Comercializadora de Energia del Mercosur S.A.(the “Company”, or “CEMSA”) trades in the wholesale electric market, on its ownaccount and on behalf of third parties, and associated with third parties.Additionally, according to the authorization granted by the Energy Departmentand the Enargas (natural gas regulatory agency), the Company is entitled toperform the same activities in the natural gas market.

 

According to Resolution No. 613 of December9, 1998, the Company obtained the authorization of the Energy Department toexport 500 MW of firm capacity and associated energy to the Federal Republic ofBrazil, during 20 years from the starting date of commercial operations of theInternational Interconnection Transmission System. The buyer is Companhia deInterconexão Energética (CIEN), which demand comes from an international bidlaunched by the Federal Republic of Brazil, with which CIEN was awarded.

 

To comply with the above mentioned export,the Company, together with Endesa Costanera S.A., initiated the FirstInternational Transmission Interconnection of high capacity between theregional systems, in order to export capacity and energy from Argentina.

 

As a consequence of that, the Company enteredinto agreements with Compañía de Transmisión del Mercosur S.A. for theconstruction, operation and maintenance of the First InternationalInterconnection System from the Transforming Station (TS) Rincón de Santa Maríato the TS Garabí, in Argentine territory; and for the national expansion, madeup of other works in Rincón de Santa María Substation. The First InternationalInterconnection System started the commercial operations on June 21, 2000.

 

On December 20, 2000, by Resolution No.263/00, the Energy Department granted to the Company the license to exportanother 1,000 MW of firm capacity and associated energy to the Federal Republicof Brazil, for the customer Companhia de Interconexão Energética.

 

To comply with this new commitment, theCompany entered into agreements with Transportadora de Energía S.A. for theconstruction, operation and maintenance of the Second InternationalInterconnection System from the TS Rincón de Santa María to the TS Garabí, inArgentine territory; and of the national expansion, made up of other works inRincón de Santa María Substation. This second system started commercialoperations at a reduced capacity of 420 MW, beginning May 1, 2002, and at fullcapacity on August 1, 2002.

 

Both lines havethe respective Convenience and Public Necessity Certificates issued by theElectricity Regulatory National Entity (ENRE), which also approved the plan ofthe corresponding transmission lines.

 

Through Resolution No. 365/01 of November 15,2001, the Company received licenses from the Energy Department to export anadditional 50 MW through the First International Interconnection for a 20year-period, and by Resolution No. 607/02 of August 8, 2002 to export another50 MW through the Second International Interconnection for the same period.

 

H-36

----

 

On January 24, 2003, the Company obtainedfrom the Energy Department export licenses Nos. 76, 77, and 78/03, to export338 MW of firm capacity and associated energy to the Republic of Uruguay, for atwo year-period beginning on February 1, 2003. On January 4, 2005 the EnergyDepartment authorized the company to export 150 MW to the same destination,over 27 months starting on February 1, 2005.

 

Additionally, the Company carries outcommercial operations in the domestic market, on its own (the Company purchasesand resells energy) and on behalf of third parties (the Company intermediatesbetween a generators and distributors/large consumers/traders), in this lastcase backed by agreements with wholesale electric market generators, whichsupport the commercialization agreements entered into with large customers anddistributors.

 

**Note 2.**                            Summary of Significant Accounting Policies

 

**a)****             ****General**

 

The financial statements have been preparedin accordance with generally accepted accounting principles in Chile and theregulations established by the Chilean Superintendence of Securities andInsurance - SVS (collectively “Chilean GAAP”).

 

The preparation of financial statements inconformity with Chilean GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities,disclosures of contingent assets and liabilities as of the date of thefinancial statements, and the reported amounts of revenues and expenses duringthe reporting year. Actual results could differ from those estimates.

 

The Company’s books and records aremaintained in Argentine pesos  inconformity with Argentine legislation, except for the elimination of certainitems such as the inflation adjustment. These financial statements have beenremeasured from Argentine pesos to US dollars, and later translated to Chileanpesos in accordance with the provisions of Technical Bulletin No. 64 (BT No.64) issued by the Chilean Accountants Association, which is applicable tocompanies operating in unstable countries (as defined pursuant to BT No. 64)that are not considered as an extension of the holding Company operations.

 

Additionally, prior to the aforementionedconversion to Chilean pesos,  theArgentine peso denominated financial statements is adjusted for the effects ofinflation using Chilean inflation rates in conformity with Technical Bulletin No. 13 of the Chilean AccountantsAssociation*.*

 

The exchange rate as of December 31, 2004 and2005 was 557.40 and 512.50 Chilean pesos, respectively, per each US dollar.Likewise, the consumer price index issued by the National Statistics Instituteof Chile was  2.5% and 3.6% for the yearsended on December 31, 2004 and 2005, respectively.

 

**b)****             ****Years covered**

 

These financial statements reflect theCompany’s financial position as of December 31, 2004 and 2005, and the resultsof its operations, changes in shareholders’ equity and its cash flows for theyears ended December 31, 2003, 2004 and 2005.

 

H-37

----

 

**c)****             ****Constant currencyrestatement**

 

•                  Comparativefinancial statements – Forcomparative purposes, the 2003, 2004 and 2005 financial statements and the amountsdisclosed in the related Notes have been restated in terms of Chilean pesos ofDecember 31, 2005, purchasing power.

 

•                  Conveniencetranslation to U.S. dollars – Thefinancial statements are stated in Chilean pesos. The translation of Chileanpesos into US dollars is included solely for the convenience of the reader,using the observed exchange rate reported by the Chilean Central Bank as ofDecember 31, 2005 of Ch$ 512.50 to US$ 1.00. The convenience translationsshould not be construed as representations that the Chilean peso amounts havebeen, could have been, or could in the future be, converted into US dollars atthis or any other rate of exchange.

 

**d)****             ****Time deposits**

 

Time deposits are presented at nominal value,plus accrued interest as of December 31, 2005. As of December 31, 2004 timedeposits were presented at original placement in US dollars, pesoified at the rate of exchange of 1.40 Argentine pesos per eachUS dollar plus the “referencestabilization coefficient” (“CER”) plus accrued interest, as applicable.

 

**e)****             ****Property, plant andequipment**

 

Property, plant and equipment are valued atthe acquisition cost, which includes all significant costs necessary to putthese assets in a position to be used in the Company’s business.

 

In accordance with Chilean GAAP, the Companyhas evaluated the recoverability of its assets. It is the Company’s policy,when evidence exists of an impairment of fixed assets, such that the Company’soperations are not expected to produce sufficient net cash flows to recover allfixed asset costs, including depreciation that the book values of those assetsmust be reduced to their net realizable values with a charge to non-operatingexpenses. The Company has not identified impairments in the net book values ofits property, plant and equipment.

 

**f)****               ****Depreciation**

 

Depreciation expense is calculated on theacquisition cost using the straight-line method over the estimated useful livesof the assets.

 

**g)****            ****Revenue recognition**

 

Revenue consists of revenue for electricpower sales and the net of purchase and revenue from sales of electric power onbehalf of third parties. Revenue is recognized when energy and capacity  are provided at rates specified undercontract terms.  In 2005, the Companyonly made sales on behalf of third parties.

 

**h)****            ****Income tax and deferredincome taxes**

 

The Company determines income tax applyingthe current legal tax rate of 35% to the taxable income of the year.  Deferred taxes are recorded  based on differences between the accountingvalues and the tax values of assets and liabilities, as well as unused taxlosses or tax credits deductible from future taxable income.

 

H-38

----

 

In addition, the Company determines theminimum deemed income tax by applying a 1% rate on certain tax basis assets atyear-end.  This tax is a complement ofincome tax. The Company’s tax obligation will be the higher of both taxes.Nevertheless, should the minimum deemed income tax exceeds during a fiscal yearthe amount of income tax, such excess can be computed as payment on account ofany surplus of income tax over the minimum deemed income tax that may occur inany of the next ten fiscal years.

 

A valuation isrecorded to the extent that management determines it is more likely than notthat the benefits of deferred tax assets will not be realized.

 

**i)****               ****Statements of cash flows**

 

The statements of cash flows have beenprepared in accordance with the indirect method.  Investments considered as cash equivalents,include time deposits with maturities less than 90 days.

 

For classification purposes, cash flows fromoperations include collections from clients and payments to suppliers, payrolland taxes.

 

**Note 3.**                            Change in accounting principles

 

There were no changes in accountingprinciples during the years ended December 31, 2003, 2004 and 2005 that wouldaffect the comparison with the prior year financial statements.

 

**Note 4.**                            Accounts, notes and other receivables

 

Current and non current accounts, amounts duefrom related companies and other receivables as of each year – end, are asfollows:

 
| ** **                          | ** ** | **As of  December 31,** | ** ** | **As of  December 31,** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **Under 90  days**      | ** ** | **91 days  to 1 year**  | ** ** | **Current** | ** ** | **Non-current** | ** ** |
| **Account**                         | ** ** | **2004**                | ** ** | **2005**                | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **ThCh$**               | ** ** | **ThCh$**               | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable                 |       | 1,230,314               |       | 1,821,968               |       | — |   | — |   | 1,230,314 |   | 1,821,968 |   | — |   | — |   |
| Amounts due from related companies  |       | 3,992,091               |       | 14,958,633              |       | 675,467 |   | — |   | 4,667,558 |   | 14,958,633 |   | — |   | — |   |
| Income taxes and V.A.T. recoverable |       | 2,216,485               |       | —                  |       | 1,135,867 |   | 2,689,598 |   | 3,352,352 |   | 2,689,598 |   | — |   | — |   |
| Other current assets                |       | 4,092,570               |       | 1,885,572               | ** ** | **—** | ** ** | **—** |   | 4,092,570 |   | 1,885,572 |   | — |   | — |   |
| Deferred income tax                 | ** ** | **—**              | ** ** | **—**              | ** ** | **—** | ** ** | **—** | ** ** | **—** |   | 484,976 | ** ** | **—** |   | — |   |
| Other – non current assets     | ** ** | **—**              | ** ** | **—**              | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** |   | 31,077 |   |
| **Total**                           | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | **13,342,794** | ** ** | **21,840,747** | ** ** | ** ** | ** ** | **31,077** | ** ** |

 

**Note 5.**                            Balances and transactions with relatedcompanies

 

The balances of accounts receivable andpayable are as follows at December 31, 2004 and 2005:

 

**a)****                                     ****Amounts due from relatedcompanies:**

 
| ** **                                     | ** ** | **As of  December 31,** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|
| ** **                                     | ** ** | **Current**             | ** ** |
| ** **                                     | ** ** | **2004**                | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **ThCh$**               | ** ** | **ThCh$** | ** ** |
| ** **                                     | ** ** | ** **              | ** ** | ** ** | ** ** |
| Companhia de Interconexão Energética |       | 4,667,558               |       | 14,956,261 |   |
| Edesur S.A.                                    |       | —                  |       | 2,372 |   |
| **Total**                                      | ** ** | **4,667,558**           | ** ** | **14,958,633** | ** ** |

 

H-39

----

 

**b)****                                     ****Amounts due to relatedcompanies:**

 
| ** **                                                | ** ** | **As of  December 31,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                | ** ** | **Current**             | ** ** |
| ** **                                                | ** ** | **2004**                | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **ThCh$**               | ** ** | **ThCh$** | ** ** |
|                                                      |       |                    |       |   |   |
| Central Costanera S.A.                                    |       | 2,931,770               |       | 7,056,167 |   |
| Hidroeléctrica  El Chocón S.A.                  |       | 341,567                 |       | 660,961 |   |
| Compañía de  Transmisión del Mercosur S.A. |       | 185,015                 |       | 322,982 |   |
| Transportadora  de Energía S.A.                      |       | 1,012,850               |       | 592,927 |   |
| Central Dock Sud S.A.                                     |       | 357,075                 |       | 530,308 |   |
| **Total**                                                 | ** ** | **4,828,277**           | ** ** | **9,163,345** | ** ** |

 

**c)****                                     ****Transactions with relatedcompanies:**

 

The details of transactions withrelated companies as of December 31, 2005 are as follows:

** **
| ** **                                                | ** ** | **Nature of  relation** | ** ** | **Description of  transaction** | ** ** | **Amount** | ** ** | **Effect in  Results  (expense)/inco  me** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|---------------------------------|------------|------------|------------|--------------------------------------------|------------|
| ** **                                                | ** ** | ** **              | ** ** | ** **                      | ** ** | **ThCh$**  | ** ** | **ThCh$**                                  | ** ** |
|                                                      |       |                    |       |                            |       |       |       |                                       |       |
| Compahia de  Interconexao Energética S.A.            |       | Direct                  |       | Energy sales                    |       | 34,060,806 |       | 34,060,806                                 |       |
| Endesa  Costanera SA                                      |       | Indirect                |       | Energy  purchases               |       | 7,598,870  |       | (7,598,870                                 | )          |
| Hidroeléctrica  el Chocón S.A.                  |       | Indirect                |       | Energy  purchases               |       | 3,429,691  |       | (3,429,691                                 | )          |
| Central Dock  Sud S.A.                                    |       | Indirect                |       | Energy  purchases               |       | 1,455,331  |       | (1,455,331                                 | )          |
| Compañía de  Transmisión del Mercosur S.A. |       | Indirect                |       | Energy  transport               |       | 2,008,772  |       | (2,008,772                                 | )          |
| Transportadora  de Energía S.A.                      |       | Indirect                |       | Energy  transport               |       | 3,687,113  |       | (3,687,113                                 | )          |

 

**Note 6.**                            Other current assets

 

Other current assets are as follows:

 
| ** **                                             | ** ** | **As of  December 31,** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **2004**                | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | **ThCh$**               | ** ** | **ThCh$** | ** ** |
|                                                   |       |                    |       |   |   |
| Time deposits in guarantee to third parties  (note 15) |       | 4,068,921               |       | 1,875,207 |   |
| Others                                                 |       | 23,649                  |       | 10,365 |   |
| ** **                                             | ** ** | **4,092,570**           | ** ** | **1,885,572** | ** ** |

 

H-40

----

 

**Note 7.**                            Property, Plant and Equipment

 

The composition of property, plant andequipment is as follows:

 
| ** **                                              | ** ** | **As of  December 31,** | ** ** | **Useful  lives** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|-------------------|------------|
| ** **                                              | ** ** | **2004**                | ** ** | **2005**          | ** ** | **Years** | ** ** |
| ** **                                              | ** ** | **ThCh$**               | ** ** | **ThCh$**         | ** ** | ** ** | ** ** |
|                                                    |       |                    |       |              |       |   |   |
| Furniture and fixtures, tools, and  computing equipment |       | 116,483                 |       | 111,310           |       | 3 |   |
| Vehicles                                                |       | 80,226                  |       | 71,200            |       | 5 |   |
| Other assets                                            |       | 114,372                 |       | 101,505           |       | 5 |   |
| Equipment and others                                    |       | 311,081                 |       | 284,015           | ** ** | ** ** | ** ** |
| Accumulated depreciation at beginning of  year          |       | (116,499                | )          | (151,760          | )          |   |   |
| Depreciation of the year                                |       | (54,499                 | )          | (47,456           | )          |   |   |
| Accumulated depreciation at end of year                 |       | (170,998                | )          | (199,216          | )          | ** ** | ** ** |
| **Total property, plant and equipment, net**            | ** ** | **140,083**             | ** ** | **84,799**        | ** ** | ** ** | ** ** |

** **

**Note 8.**                            Income taxes payable and deferred taxes.

 

**a)****                                     **Income taxes payable as of each year-end areas follows:

 
| ** **                          | ** ** | **As of  December 31,** | ** ** |
|-------------------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **2004**                | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **ThCh$**               | ** ** | **ThCh$** | ** ** |
|                                |       |                    |       |   |   |
| Income tax provision – current |       | 764,310                 |       | 415,491 |   |
| ** **                          | ** ** | **764,310**             | ** ** | **415,491** | ** ** |

 

**b)****                                     **Deferred taxes asof each year-end are as follows**:**

** **
| ** **               | ** ** | **2004**                    | ** ** | **2005**                         | ** ** |
|--------------------------|------------|-----------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **Deferred  taxes  Assets** | ** ** | **Deferred  taxes  Liabilities** | ** ** | **Deferred  taxes  Assets** | ** ** | **Deferred  taxes  Liabilities** | ** ** |
| **Concepts**             | ** ** | **Short  term  M$**         | ** ** | **Long  term  M$**               | ** ** | **Short  term  M$** | ** ** | **Long  term  M$** | ** ** | **Short  term  M$** | ** ** | **Long  term  M$** | ** ** | **Short  Term  M$** | ** ** | **Long  term  M$** | ** ** |
|                     |       |                        |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Temporary differences    |       | —                      |       | —                           |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Exchange rate            |       | —                      |       | —                           |       | — |   | 71,629 |   | — |   | — |   | — |   | 54,168 |   |
| Depreciation             |       | —                      |       | —                           |       | — |   | 2,616 |   | — |   | 8,904 |   | — |   | — |   |
| Non deductible allowance |       | —                      |       | 9,246                            |       | — |   | — |   | 484,976 |   | — |   | — |   | — |   |
| **Totals**               | ** ** | **—**                  | ** ** | **9,246**                        | ** ** | **—** | ** ** | **74,245** | ** ** | **484,976** | ** ** | **8,904** | ** ** | **—** | ** ** | **54,168** | ** ** |

 

**c)****                                     **The net effect of recording taxes resulted ina net charge to income of ThCh$ (835,134) and ThCh$ 83,338 in the years endedDecember 31, 2004 and 2005, respectively.

** **
| ** **           | ** ** | **2004**     | ** ** | **2005**   | ** ** |
|----------------------|------------|--------------|------------|------------|------------|
| ** **           | ** ** | **ThCh$**    | ** ** | **ThCh$**  | ** ** |
|                 |       |         |       |       |       |
| Income tax provision |       | (764,310     | )          | (415,491   | )          |
| Deferred taxes       |       | (70,824      | )          | 498,829    |       |
| **Total**            | ** ** | **(835,134** | **)**      | **83,338** | ** ** |

 

H-41

----

 

**Note 9.**                            Other current liabilities

** **

**Other current liabilitiesare as follows:**

** **
| ** **        | ** ** | **As of December 31,** | ** ** |
|-------------------|------------|------------------------|------------|
| ** **        | ** ** | **2004**               | ** ** | **2005** | ** ** |
| ** **        | ** ** | **ThCh$**              | ** ** | **ThCh$** | ** ** |
|              |       |                   |       |   |   |
| Customer advances |       | —                 |       | 2,463,619 |   |
| Others            |       | 148,581                |       | 236,630 |   |
| Total             | ** ** | **148,581**            | ** ** | **2,700,249** | ** ** |

 

**Note 10.**                     Shareholders’ Equity

 

**a)****             ****Dividends**

 

During the years ended December 31, 2003,2004 and 2005 the Company has not paid dividends.

 

**b)****             ****Number of shares**

 

As of December 31, 2004 and 2005 the numberof shares authorized, issued and outstanding was 14,012,000, all of which havevoting rights.

 

**c)****             ****Subscribed and paid-incapital:**

 
| ** **                          | ** ** | **As of December 31, 2005** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **Shares**                  | ** ** | **ThCh$** | ** ** |
|                                |       |                        |       |   |   |
| As of December 31, 2004             |       | 14,012,000                  |       | 7,810,289 |   |
| Exchange rate conversion difference |       | —                      |       | (629,139 | ) |
| **As of December 31, 2005**         | ** ** | **14,012,000**              | ** ** | **7,181,150** | ** ** |

 

**d)****             ****Other reserves**

 

Other reserves accounts comprises the legalreserve, recorded in accordance with the Argentine Corporations Law and thearticles of incorporation, of 5% of the net income for the year, after prioryear adjustments if any, until such reserve equals 20% of the capital.

 

**Note 11.**                     Other non-operating income and expenses

 

**a)****                                     **The detail of other non-operating income isas follows:

 
| ** **                     | ** ** | **As of December 31,** | ** ** |
|--------------------------------|------------|------------------------|------------|
| ** **                     | ** ** | **2003**               | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                     | ** ** | **ThCh$**              | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                           |       |                   |       |   |   |   |   |
| Effect of application of BT 64 |       | 232,201                |       | — |   | 104,708 |   |
| Others                         |       | —                 |       | 606,308 |   | 146,069 |   |
| **Total**                      | ** ** | **232,201**            | ** ** | **606,308** | ** ** | **250,777** | ** ** |

 

H-42

----

 

**b)****             **Other non-operating expenses are as follows:

 
| ** **                     | ** ** | **As of December 31,** | ** ** |
|--------------------------------|------------|------------------------|------------|
| ** **                     | ** ** | **2003**               | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                     | ** ** | **ThCh$**              | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                           |       |                   |       |   |   |   |   |
| Effect of application of BT 64 |       | —                 |       | 48,136 |   | — |   |
| Others                         |       | 8,387                  |       | — |   | — |   |
| ** **                     | ** ** | **8,387**              | ** ** | 48,136 | ** ** | — | ** ** |

** **

**Note 12.**                     Commitments with Banco Santander CentralHispano

** **

As a guarantee forthe financing obtained for the construction of the two interconnection linesmentioned in note 1, the related companies Companhia de Interconexão Energética (CIEN),Compañía de Transmisión del Mercosur S.A., (CTM) and Transportadora de EnergíaS.A. (TESA) (collectively, the “Project Companies”) assigned to Banco SantanderCentral Hispano S.A. (Collateral Agent), and to the other lenders, inconformity with the trust collateral assignments as well as documentssubscribed by the Company denominated Security Consent, the rights against theCompany arising from the contracts in force between the Company and the ProjectCompanies (transmission fee). Through such assignment, the Company hadcommitted to pay to Banco Río de la Plata S.A, as trustee, all the amounts dueto the Project Companies related to the above mentioned contracts. Also, theCollateral Agent will have the right to exercise all the rights held by theProject Companies under the terms of the contracts assigned, by means of truenotice given to the Company.

 

On December 23, 2004, the Project Companiesentered into a contract with the lenders called Second Global AmendmentAgreement (SGAA) by which such entities committed not to exercise any of therights granted through the assignment, among which there are the Trust Contractand the Security Agreement indicated above, and the Project Companies areentitled to request the termination of such contracts, whenever there is nobreach of contract to the obligations imposed by the documents that support thefinancing that are not duly formalized

 

Due to the above, on August 8, 2005 theProject Companies subscribed with the BSCH (acting on its own behalf and inrepresentation of the other lenders) the Agreement of Termination of the TrustContracts referred to above, having all the debtors assigned been notified ofthe cancellation of such trust assignment.

 

H-43

----

 

**Note 13.**                     Foreign Currencies

 

As of December 31, 2004 and 2005, foreigncurrency denominated assets and liabilities are as follows:

 
| ** **                                                                                                             | ** ** | ** **     | ** ** | **As of  December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|-------------------------|------------|
| **Account**                                                                                                            | ** ** | **Currency**   | ** ** | **2004**                | ** ** | **2005** | ** ** |
| ** **                                                                                                             | ** ** | ** **     | ** ** | **ThCh$**               | ** ** | **ThCh$** | ** ** |
|                                                                                                                   |       |           |       |                    |       |   |   |
| **a)**             **Current assets**                      |       |           |       |                    |       |   |   |
| Cash                                                                                                                   |       | US$            |       | 5,116,998               |       | 627,217 |   |
|                                                                                                                   |       | Argentine Peso |       | 459,534                 |       | 1,926,889 |   |
| Time deposits                                                                                                          |       | Argentine Peso |       | 46,541                  |       | — |   |
|                                                                                                                   |       | US$            |       | —                  |       | 3,365,670 |   |
| Accounts receivable, net                                                                                               |       | US$            |       | 478,535                 |       | 1,081,182 |   |
|                                                                                                                   |       | Argentine Peso |       | 751,779                 |       | 740,786 |   |
| Amounts due from related companies                                                                                     |       | US$            |       | 4,664,252               |       | 14,958,633 |   |
|                                                                                                                   |       | Argentine Peso |       | 3,306                   |       | — |   |
| Income taxes and V.A.T. recoverable                                                                                    |       | US$            |       | 1,394,683               |       | 1,756 |   |
|                                                                                                                   |       | Argentine Peso |       | 1,957,669               |       | 2,687,842 |   |
| Other current assets                                                                                                   |       | US$            |       | 3,549,202               |       | 1,875,207 |   |
|                                                                                                                   |       | Argentine Peso |       | 543,368                 |       | 10,365 |   |
| **Total current assets**                                                                                               | ** ** | ** **     | ** ** | **18,965,867**          | ** ** | **27,275,547** | ** ** |
|                                                                                                                   |       |           |       |                    |       |   |   |
| **b)**              **Property, plant and equipment** |       |           |       |                    |       |   |   |
| Equipment and others                                                                                                   |       | US$            |       | 311,081                 |       | 284,015 |   |
| Accumulated depreciation                                                                                               |       | US$            |       | (170,998                | )          | (199,216 | ) |
| **Total Property, plant and equipment, net**                                                                           | ** ** | ** **     | ** ** | **140,083**             | ** ** | **84,799** | ** ** |
|                                                                                                                   |       |           |       |                    |       |   |   |
| **c)**              **Non current assets**            |       |           |       |                    |       |   |   |
| Deferred income tax                                                                                                    |       | Argentine Peso |       | —                  |       | 484,976 |   |
| Other non-current assets                                                                                               |       | Argentine Peso |       | —                  |       | 31,077 |   |
| **Total non current assets**                                                                                           | ** ** | ** **     | ** ** | **—**              | ** ** | **516,053** | ** ** |
|                                                                                                                   |       |           |       |                    |       |   |   |
| **Total assets**                                                                                                       | ** ** | ** **     | ** ** | **19,105,950**          | ** ** | **27,876,399** | ** ** |
|                                                                                                                   |       |           |       |                    |       |   |   |
| **d)**             **Total assets**                        |       |           |       |                    |       |   |   |
| Total assets by currency                                                                                               |       | US$            |       | 15,343,754              |       | 21,994,464 |   |
|                                                                                                                   |       | Argentine Peso |       | 3,762,196               |       | 5,881,935 |   |
| **Total assets**                                                                                                       | ** ** | ** **     | ** ** | **19,105,950**          | ** ** | **27,876,399** | ** ** |

 

H-44

----

 
| ** **                                                  | ** ** | ** **      | ** ** | **As of  December 31,** | ** ** |
|-------------------------------------------------------------|------------|-----------------|------------|-------------------------|------------|
| **Account**                                                 | ** ** | **Currency**    | ** ** | **2004**                | ** ** | **2005** | ** ** |
| ** **                                                  | ** ** | ** **      | ** ** | **ThCh$**               | ** ** | **ThCh$** | ** ** |
|                                                        |       |            |       |                    |       |   |   |
| **e)**     **Current liabilities**      |       |            |       |                    |       |   |   |
| Accounts payable                                            |       | Argentine Peso  |       | 4,361,549               |       | 7,587,958 |   |
| Amounts payable to related companies                        |       | US$             |       | 3,232,210               |       | 7,510,975 |   |
|                                                        |       | Argentine  Peso |       | 1,596,067               |       | 1,652,370 |   |
| Withholdings                                                |       | Argentine Peso  |       | 108,081                 |       | 16,639 |   |
| Income taxes payable                                        |       | Argentine Peso  |       | 764,310                 |       | 415,491 |   |
| Other current liabilities                                   |       | Argentine Peso  |       | —                  |       | 236,630 |   |
|                                                        |       | US$             |       | 148,581                 |       | 2,463,619 |   |
| **Total current liabilities**                               | ** ** | ** **      | ** ** | **10,210,798**          | ** ** | **19,883,682** | ** ** |
|                                                        |       |            |       |                    |       |   |   |
| **f)**     **Non-Current  liabilities** |       |            |       |                    |       |   |   |
| Other non-current liabilities                               |       | Argentine Peso  |       | 64,999                  |       | 45,264 |   |
| **Total non-current liabilities**                           | ** ** | ** **      | ** ** | **64,999**              | ** ** | **45,264** | ** ** |
| ** **                                                  | ** ** | ** **      | ** ** | ** **              | ** ** | ** ** | ** ** |
| **Total liabilities**                                       | ** ** | ** **      | ** ** | **10,275,797**          | ** ** | **19,928,946** | ** ** |
|                                                        |       |            |       |                    |       |   |   |
| **g)**    **Total  liabilities**             |       |            |       |                    |       |   |   |
| Total liabilities by currency                               |       | US$             |       | 3,232,211               |       | 9,974,594 |   |
|                                                        |       | Argentine  Peso |       | 7,043,586               |       | 9,954,352 |   |
| **Total liabilities**                                       | ** ** | ** **      | ** ** | **10,275,797**          | ** ** | **19,928,946** | ** ** |

** **

**Note 14.**                     Power sale contracts to Brazil

** **

On June 21, 2000 the Company startedexporting 500MW of capacity and associated energy to Brazil under the terms ofa contract  with CIEN. Pursuant thereto,the Company signed two contracts with Central Piedra Buena S.A. and Endesa CostaneraS.A. under which these generators will each supply 250MW of capacity andassociated energy to the Company. Under such contracts, CEMSA acts on behalf ofthe generators (the Company intermediates between a generator anddistributors/large consumers/traders), and also on its own (the Companypurchases and resells energy) as from 2002. During a 20-year term, generatorstransfer the marketing of two 250MW blocks of the total production capacity ofpower of their plants located in Bahía Blanca and in the City of Buenos Aires,respectively, to meet the supply to CIEN. The Company shall reimburse toCentral Piedra Buena S.A. and to Endesa Costanera S.A. the amounts collectedfrom Companhia de Interconexão Energética for providing the capacity and theassociated electric energy.

 

Duringfiscal year 2001, the Company has entered into a contract with CIEN in which itagreed to supply an additional 50 additional MW of capacity and associatedenergy. To comply with such obligation, the Company signed an agreement withCentrales Térmicas del Noroeste S.A. which started operating on December 1,2001.

 

As mentioned in Note 1, onDecember 20, 2000 under Resolution 263/00, the Energy Department granted theCompany a permit to export 1000 additional MW of capacity and associated energyto Brazil, as from the start - up of the Second Electric Energy TransmissionSystem of International Connection which occurred on August 1, 2002. Thecustomer is CIEN. To fulfil such obligation, CEMSA has signedtrading agreements with several generators.

 

H-45

----

 

InApril 2005, the Brazilian customer called for dispatch of approximately 1690MW.The supply was not fully complied with due to lack of availability (includingfuel) of certain support units, and the obstacle from CAMMESA, on the basis ofResolutions of the Energy Department 839/2004 (which allow to export energyonly if it is generated with natural gas) and 949/2004 (which forbid topurchase power in the spot market if the turbines assigned to dispatch theexports are not available). Consequently, CEMSA reported to CIEN a partialforce majeure situation.

 

DuringApril, Endesa Costanera S.A., Central Dock Sud S.A., AES Alicurá S.A., AESJuramento S.A., Central Piedra Buena S.A. (CPB), and Central Térmica delNoroeste S.A., supporters of the export contracts, have all claimed unavoidableaction and force majeure. Consequently, on April 2, 2005 CEMSA reported its ownforce majeure condition. Subsequently, the generators referred to above invokeddisruption of the economic-financial equilibrium of the contracts.

 

CEMSA,in its capacity as agent of the generators, reported on April 29, 2005 theclaims to the Brazilian customer.

 

Subsequently, CPB notified the unilateraltermination of the Generating Marketing Agreements. CEMSA rejected thetermination.

 

The Energy Department took action andsubmitted the antecedents to the Electricity Regulatory National Entity(ENRE).

 

Meanwhile, On December 9, 2005 the Argentineand Brazilian authorities had signed an Agreement on the Understanding ofEnergy Matters for the Interim Period, by which both countries engaged to “carryout possible actions to adjust the electric energy export regulations for theInterim Period” (from the signature of the Agreement and December 31, 2008).The Agreement is the framework to channel the renegotiation of the exportcontracts.

 

AES Alicurá S.A., AES Juramento S.A., CentralDock Sud S.A. and Endesa Costanera S.A. are currently renegotiating with CEMSAthe termination and/or suspension of the Marketing Agreements, notwithstandingthe offers that are being discussed for an Interim Period to re-adapt theWholesale electric market (WEM).

** **

**Note 15.****Guarantees granted**

 

Thecompany has granted guarantees of Th$Ch 1,798,842 and Th$Ch 76,365 in favor ofTransportadora de Gas del Norte S.A. (TGN) and Transportadora de Gas del SurS.A. (TGS), respectively. TGN and TGS are two natural gas transporters, and theguarantees were granted to participate in the Open Bidding for Expanding TGS andTGN Gas-pipeline Systems, which have been called under the request of the GasNational Regulatory Agency (ENARGAS). These guarantees were grantedestablishing a counter — guarantee over funds deposited abroad.

 

Additionally, in 2005, theCompany has granted a guarantee in a favor of CAMMESA for ThCh$ 520,100 underthe terms of the regulations related to the traders operating in the WhosaleElectric Market.  The guarantee wasgranted by a bank on behalf the Company. As of December 31, 2004, the guarantee in favor of CAMMESA amounted toThCh$ 3,537,291, and was granted establishing a counter – guarantee over fundsdeposited abroad.

** **

**Note16. Differences between Chilean and United States Generally Accepted AccountingPrinciples**

** **

**Chilean GAAP varies in certainimportant respects from U.S. GAAP. Such differences involve certain methods formeasuring the amounts shown in the financial statements.**

 

H-46

----

 

**I.    Differences in Measurement Methods**

 

The principal differences between ChileanGAAP and U.S. GAAP are described below together with an explanation, whereappropriate, of the method used in the determination of the adjustments thataffect net income and total shareholders ́ equity. References below to “SFAS”are to Statements of Financial Accounting Standards issued by the FinancialAccounting Standards Board in the United States of America.

** **

**a)**              Inflationaccounting

 

The cumulative inflation rate in Chile asmeasured by the consumer price index for the three-year period ended December31, 2005 was approximately 7.1%. Pursuant to Chilean GAAP, the Company’sfinancial statements recognize certain effects of inflation. The inclusion ofprice-level adjustments in the accompanying financial statements is consideredappropriate under the prolonged inflationary conditions affecting the Chileaneconomy even though the cumulative inflation rate for the last three years doesnot exceed 100%. As allowed pursuant to Form-20-F the reconciliation includedherein of net income and shareholders’ equity, as determined in accordance withU.S. GAAP, excludes adjustments attributable to the effect of differencesbetween the accounting for inflation under Chilean GAAP versus U.S. GAAP.

 

**b)**              Derivativeinstruments

 

The interconnection lines mentioned in Note1, were built to sell energy generated in Argentina in the Brazilian market, asthe Brazilian energy market heavily relies on hydro-electric generation and hashistorically had significant problems with meeting its energy needs economicallydue to lack of rainfall. In order to calculate the fair values of the purchaseand sale contracts related to the energy to be sold in the Brazilian market,the Argentine market prices were used. The Company considers the Argentineprices to be the correct benchmark to value the fair value of theinterconnection contracts because the Company does not have concessions to sellthe Argentine generated energy in the Brazilian market to any parties otherthan those currently contracted. Therefore the Company views theinterconnection as an extension of the Argentine market and as a moreappropriate measure of the fair value of energy.

 

Because both the purchases and salesinterconnection contracts are for periods up to 20 years in complex markets,where no similar term forward market information is available, the Company hasestimated such values based on the best information available, including usingmodeling and other valuation techniques. The Company has recorded the bestestimate of fair value, however with different assumptions such as interestrates, inflation rates, exchange rates, electricity rates, and increases incost trends, materially different fair values could result. As a result suchestimates are highly volatile and dependent upon the assumptions used. Theassumption to measure the fair value of these interconnection related contractsusing the Argentine market prices may have a significant effect on the Company’snet income and shareholders’ equity.

 

SFAS 133 requires that certain embedded derivativesbe separated and reported on the balance sheet at fair value and be subject tothe same rules as other derivative instruments. Current Chilean accounting rules do not consider the existence ofderivative instruments embedded in other contracts and therefore they are notreflected in the financial statements under Chilean GAAP.

 

The effects of the adjustment with respect toembedded derivatives for the years ended December 31, 2003, 2004 and 2005 areincluded in the net income and shareholders’ equity reconciliation to US GAAPunder paragraph (c) below.

 

H-47

----

 

**c)**              Effectof conforming to U.S. GAAP

** **

The reconciliation of reported net income(loss) required to conform to U.S. GAAP is as follows:

** **
| ** **                                                         | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                         | ** ** | **2003**               | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                         | ** ** | **ThCh$**              | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                                               |       |                   |       |   |   |   |   |
| **Net income in accordance with Chilean GAAP**                     |       | 1,438,723              |       | 1,333,438 |   | 110,714 |   |
|                                                               |       |                   |       |   |   |   |   |
| Derivative instruments                                             |       | 5,963,800              |       | (14,261,508 | ) | (62,062,606 | ) |
| Deferred tax effects on the U.S. GAAP  adjustments                 |       | (2,087,330             | )          | 4,991,528 |   | 21,721,912 |   |
| **Net income (loss) in accordance with U.S.  GAAP**                | ** ** | **5,315,193**          | ** ** | **(7,936,542** | **)** | **(40,229,980** | **)** |
|                                                               |       |                   |       |   |   |   |   |
| Other comprehensive income (loss):                                 |       |                   |       |   |   |   |   |
| Cumulative translation adjustment related  to U.S GAAP adjustments |       | (9,700,617             | )          | (4,374,504 | ) | (4,099,635 | ) |
| Cumulative translation adjustment under  Chilean GAAP              |       | 1,260,966              |       | 472,548 |   | 686,574 |   |
|                                                               |       |                   |       |   |   |   |   |
| **Comprehensive income (loss) in accordance  with U.S.GAAP**       | ** ** | **(3,124,458**         | **)**      | **(11,838,498** | **)** | **(43,643,041** | **)** |

** **

**The reconciliation toconform shareholders’ equity amounts to U.S. GAAP is as follows:**

** **
| ** **                                                  | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                  | ** ** | **2003**               | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                                        |       | **ThCh$**              |       | **ThCh$** |   | **ThCh$** |   |
|                                                        |       |                   |       |   |   |   |   |
| Shareholders’ equity in accordance with  Chilean GAAP  |       | 8,180,910              |       | 8,830,153 |   | 7,947,453 |   |
|                                                        |       |                   |       |   |   |   |   |
| Derivative instruments                                      |       | 73,101,292             |       | 52,726,093 |   | (15,268,330 | ) |
| Deferred tax effects on the U.S. GAAP  adjustments          |       | (25,585,452            | )          | (18,454,133 | ) | 5,343,915 |   |
|                                                        |       |                   |       |   |   |   |   |
| **Shareholders’ equity in accordance with  U.S. GAAP** | ** ** | **55,696,750**         | ** ** | **43,102,113** | ** ** | **(1,976,962** | **)** |

 

**II.    Additional disclosure requirements**

 

**(a)**          Basicand diluted earnings per share:

** **
| ** **                                                                                                            | ** ** | **For the year ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                            | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                                                                                                  | ** ** | **ThCh$**                           | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
| Chilean GAAP earnings per share                                                                                       |       | 0,10                                |       | 0,10 |   | 0,008 |   |
| U.S. GAAP earnings (loss) per share:                                                                                  |       |                                |       |   |   |   |   |
| •  U.S.GAAP earnings (loss) per  share before effect of cumulative effect of change in accounting principle |       | 0,38                                |       | (0,57 | ) | (2,87 | ) |
| •  Cumulative effect of change in accounting  principle (net of tax)                                        |       |                                |       |   |   |   |   |
| •  Basic and diluted U.S. GAAP earnings (loss)  per share                                                   |       | 0,38                                |       | (0,57 | ) | (2,87 | ) |
| Total number of common outstanding shares  at December 31,                                                            |       | 14,012,000                          |       | 14,012,000 |   | 14,012,000 |   |
| Weighted average number of common share  outstanding                                                                  |       | 14,012,000                          |       | 14,012,000 |   | 14,012,000 |   |

** **

**Theearnings per share figures for both U.S. GAAP and Chilean GAAP purposes havebeen calculated by dividing the respective earnings (loss) amounts inaccordance with U.S. GAAP and Chilean GAAP, respectively, by the weightedaverage number of common shares outstanding during the year.  The Company has not issued convertible debtor contingent equity securities. Consequently, there are no potentially dilutive effects on the earningsper share of the Company.**

 

H-48

----

 

**b)****             ****Cash flow information**:

 

(i)             The statement of cash flows under Chile GAAPdiffers in certain respects from the presentation of a statement of cash flowunder U.S. GAAP as follows:

 
| ** **                                                          | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                          | ** ** | **2003**               | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                                                |       | **ThCh$**              |       | **ThCh$** |   | **ThCh$** |   |
|                                                                |       |                   |       |   |   |   |   |
| Cash (used in) provided by operating  activities under Chilean GAAP |       | (625,863               | )          | 447,231 |   | 304,634 |   |
| Cash (used in) provided by operating  activities under US GAAP      |       | (625,863               | )          | 447,231 |   | 304,634 |   |
| Cash used in investing activities under  Chilean GAAP               |       | (117,875               | )          | (21,818 | ) | (7,932 | ) |
| Cash used in investing activities under US  GAAP                    |       | (117,875               | )          | (21,818 | ) | (7,932 | ) |

 
| (ii) |   | Cash and cash equivalents  includes all highly liquid debt instruments purchased with an original  maturity of three months or less: |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------|

 
| ** **                                          | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|
| ** **                                          | ** ** | **2003**               | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                                |       | **ThCh$**              |       | **ThCh$** |   | **ThCh$** |   |
|                                                |       |                   |       |   |   |   |   |
| Cash                                                |       | 5,486,123              |       | 5,576,532 |   | 2,554,106 |   |
| Time deposits                                       |       | 50,961                 |       | 46,541 |   | 3,365,670 |   |
| Total cash and cash equivalents under  Chilean GAAP |       | 5,537,084              |       | 5,623,073 |   | 5,919,776 |   |
| Total cash and cash equivalents under US  GAAP      |       | 5,537,084              |       | 5,623,073 |   | 5,919,776 |   |

 

(iii)       Additional disclosures :

 
| ** **                        | ** ** | **As of December 31,** | ** ** |
|-----------------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **2003**               | ** ** | **2004** | ** ** | **2005** | ** ** |
|                              |       | **ThCh$**              |       | **ThCh$** |   | **ThCh$** |   |
|                              |       |                   |       |   |   |   |   |
| Income taxes paid during the year |       | (364,583               | )          | (311,652 | ) | (1,029,283 | ) |
| Fixed assets acquired             |       | (117,875               | )          | (21,818 | ) | (7,932 | ) |

 

**d)**              Disclosuresabout fair value of financial instruments

 

The following methods and assumptions wereused to estimate the fair value of each class of financial instruments as ofDecember 31, 2004 and 2005 for which it is practicable to estimate that value:

 

•                      **Cash –**The fair value of the Company’s cash is equalto its carrying value.

 

•                      **Time deposits –** The fair value of time deposits approximatescarrying value due to the relatively short-term nature.

 

H-49

----

 

The estimated fair values of the Company’sfinancial instruments compared to Chilean GAAP carrying amounts are as follows:

 
| ** **                           | ** ** | **2004**             | ** ** | **2005**       | ** ** |
|--------------------------------------|------------|----------------------|------------|----------------|------------|
| ** **                           | ** ** | **Carrying  amount** | ** ** | **Fair value** | ** ** | **Carrying  amount** | ** ** | **Fair value** | ** ** |
| ** **                           | ** ** | **ThCh$**            | ** ** | **ThCh$**      | ** ** | **ThCh$** | ** ** | **ThCh$** | ** ** |
|                                 |       |                 |       |           |       |   |   |   |   |
| Cash                                 |       | 5,576,532            |       | 5,576,532      |       | 2,554,106 |   | 2,554,106 |   |
| Time deposits                        |       | 46,541               |       | 46,541         |       | 3,365,670 |   | 3,365,670 |   |
| Accounts receivable, net             |       | 1,230,314            |       | 1,230,314      |       | 1,821,968 |   | 1,821,968 |   |
| Amounts due from related companies   |       | 4,667,558            |       | 4,667,558      |       | 14,958,633 |   | 14,958,633 |   |
| Income taxes and V.A.T. recoverable  |       | 3,352,352            |       | 3,352,352      |       | 2,689,598 |   | 2,689,598 |   |
| Deferred income tax                  |       | —               |       | —         |       | 484,976 |   | 484,976 |   |
| Other current assets                 |       | 4,092,570            |       | 4,092,570      |       | 1,885,572 |   | 1,885,572 |   |
| Other non current assets             |       | —               |       | —         |       | 31,077 |   | 31,077 |   |
| Accounts payable                     |       | 4,361,549            |       | 4,361,549      |       | 7,587,958 |   | 7,587,958 |   |
| Amounts payable to related companies |       | 4,828,277            |       | 4,828,277      |       | 9,163,345 |   | 9,163,345 |   |
| Withholdings                         |       | 108,081              |       | 108,081        |       | 16,639 |   | 16,639 |   |
| Income taxes payable                 |       | 764,310              |       | 764,310        |       | 415,491 |   | 415,491 |   |
| Other current liabilities            |       | 148,581              |       | 148,581        |       | 2,700,249 |   | 2,700,249 |   |
| Other non-current liabilities        |       | 64,999               |       | 64,999         |       | 45,264 |   | 45,264 |   |
| Derivative contracts                 |       | 52,726,093           |       | 52,726,093     |       | 15,268,330 |   | 15,268,330 |   |

 

H-50

----