AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 28, 2002
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
(Mark One)
[ ] Registration statement pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934;
or
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 2001;
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______________ to_____
___________
Commission File No. 02583848
HQI TRANSELEC CHILE S.A.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
N/A
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(Translation of Registrant's name into English)
REPUBLIC OF CHILE
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(Jurisdiction of incorporation or organization)
APOQUINDO 3721, PISO 6, LAS CONDES, SANTIAGO, CHILE
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the
Act: NONE.
Securities registered or to be registered pursuant to Section 12(g) of the
Act: NONE.
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- -------------------------------- -----------------------------------------
$465,000,000 7-7/8% Senior Notes Luxembourg Stock Exchange
due 2011
HQI Transelec Chile S.A. had 1,000,000 shares of no par value common stock
outstanding as of December 31, 2001.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 [ ] Item 18 [X]
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HQI TRANSELEC CHILE S.A.
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
Factors Affecting Forward-Looking Statements................................. ii
Item 1. Identity of Directors, Senior Management and Advisers........ 1
Item 2. Offer Statistics and Expected Timetable...................... 1
Item 3. Key Information.............................................. 1
Item 4. Information on the Company................................... 9
Item 5. Operating and Financial Review and Prospects................. 23
Item 6. Directors, Senior Management and Employees................... 30
Item 7. Major Shareholders and Related Party Transactions............ 34
Item 8. Financial Information........................................ 35
Item 9. The Offer and Listing........................................ 35
Item 10. Additional Information....................................... 36
Item 11. Quantitative and Qualitative Disclosures About Market Risk... 44
Item 12. Description of Securities Other than Equity Securities....... 45
PART II...................................................................... 45
Item 13. Defaults, Dividend Arrearages and Delinquencies.............. 45
Item 14. Material Modification to the Rights of Security Holders
and Use of Proceeds.......................................... 45
Item 15. [Reserved]................................................... 45
Item 16. [Reserved]................................................... 45
PART III..................................................................... 46
Item 17. Financial Statements......................................... 46
Item 18. Financial Statements......................................... 46
Item 19. Exhibits..................................................... 46
i
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This annual report on Form 20-F contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Specifically,
certain statements under the captions "Item 3.D. -- Key Information -- Risk
factors," "Item 4.B. -- Information on the Company -- Business overview" and
"Item 5. -- Operating and Financial Review and Prospects" relating to our
current expectations, intentions and projections about future events affecting
our business. These statements include, but are not limited to:
o trends affecting our financial condition or results of operation,
o any statements preceded by, followed by or that include the words
"believes," "expects," "predicts," "anticipates," "intends,"
"estimates," "should," "may" or similar expressions, and
o other statements contained in this annual report regarding matters
that are not historical facts.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially from those contained in such forward-looking statements include, but
are not limited to:
o our ability to implement our capital expenditure plan, including our
ability to arrange financing when required,
o political, economic, regulatory and demographic developments in Chile
where we conduct all of our business, and
o the factors set forth under "Item 3.D. -- Key Information -- Risk
factors" beginning on page 6 of this annual report.
You should not place undue reliance on such statements, which speak only as
of the date that they were made. Our independent public accountants have not
examined or compiled the forward-looking statements and, accordingly, do not
provide any assurance with respect to such statements. These cautionary
statements should be considered in connection with any written or oral
forward-looking statements that we may issue in the future. We do not undertake
any obligation to release publicly any revisions to such forward-looking
statements to reflect later events or circumstances or to reflect the occurrence
of unanticipated events.
ii
WHEN USED IN THIS ANNUAL REPORT, THE TERMS "HQI TRANSELEC," "THE COMPANY,
"WE," "OUR," AND "US" REFER TO HQI TRANSELEC CHILE S.A.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
PRESENTATION OF FINANCIAL INFORMATION
We maintain our books and records in Chilean pesos, the official currency
of Chile, and prepare our financial statements in constant Chilean pesos in
conformity with Chilean GAAP. Chilean GAAP differs in certain important respects
from U.S. GAAP. See note 25 to our financial statements for the three years
ended December 31, 2001 contained in this annual report for a description of the
principal differences between Chilean GAAP and U.S. GAAP as they relate to us
and a reconciliation to U.S. GAAP of net income for the years ended December 31,
2001 and 1999 and for the periods from January 1 to October 22, 2000 and from
October 23, 2000 to December 31, 2000 and total shareholders' equity at December
31, 1999, 2000 and 2001. The combined financial statements at December 31, 1999
included in this annual report have been audited by Deloitte & Touche. The
combined financial statements for the period from January 1, 2000 to October 22,
2000 and the consolidated financial statements as of December 31, 2000, and for
the period from October 23, 2000 to December 31, 2000, and the financial
statements at December 31, 2001 included in this annual report have been audited
by PricewaterhouseCoopers.
Our financial statements for the three years ended December 31, 2001 are
expressed in constant Chilean pesos of December 31, 2001. See note 3(c)(i) to
our financial statements for the three years ended December 31, 2001. For
Chilean accounting purposes, inflation adjustments are calculated based upon a
one-month lag convention using an inflation adjustment factor based on the
consumer price index or CPI (INDICE DE PRECIOS AL CONSUMIDOR). The CPI is
published by Chile's National Institute of Statistics (INSTITUTO NACIONAL DE
ESTADISTICAS).
We are a wholly-owned subsidiary of Hydro-Quebec. We had no significant
operations until we acquired on October 23, 2000 Compania Nacional de
Transmision Electrica S.A., or Transelec, and through Transelec, most of the
remaining transmission assets from Empresa Nacional de Electricidad S.A., or
Endesa. The remaining transmission assets are referred to in this annual report
as the injected assets, and together with Transelec, as the transmission
business. The combined financial statements as of December 31, 1999, and for the
period from January 1, 2000 to October 22, 2000 represent the transmission
business and include the historical financial statements of Transelec and the
injected assets acquired from Endesa on a carve-out basis. The consolidated
financial statements as of December 31, 2000, and for the period from October
23, 2000 to December 31, 2000 and the financial statements at December 31, 2001
(to the extent relevant) include our accounts as HQI Transelec and our
subsidiary, Transelec. On January 18, 2001, HQI Transelec absorbed Transelec,
which ceased to exist from that date.
As a consequence of our acquisition of the transmission business, the
financial statements of the transmission business for periods prior to October
23, 2000 prepared in accordance with Chilean GAAP are not fully comparable to
the financial statements of HQI Transelec. The more significant
1
differences relate to the amortization of goodwill, higher interest expense
related to the inter-company debt, greater exposure to exchange rate
fluctuations and the increased depreciation related to our higher basis in the
assets acquired from Endesa. See note 2 to our financial statements for the
three years ended December 31, 2001 and "Item 5.A. -- Operating and Financial
Review and Prospects -- Overview."
For the convenience of the reader, this annual report contains translations
of certain Chilean peso amounts into U.S. dollars at specified rates. Unless
otherwise indicated, the U.S. dollar equivalent for information in Chilean pesos
is based on the observed exchange rate reported by the Central Bank of Chile,
referred to in this annual report as the Central Bank, for December 31, 2001,
which was Ch$654.79 per US$1.00. See " -- Selected financial data -- Exchange
rates." The Federal Reserve Bank of New York does not report a noon buying rate
for Chilean pesos. We make no representation that the Chilean peso or U.S.
dollar amounts shown in this annual report could have been or could be converted
into U.S. dollars or Chilean pesos, at this rate or at any other rate.
Unless otherwise specified, references herein to "U.S. dollars," "dollars,"
"$" or "US$" are to United States dollars, references herein to "pesos" or "Ch$"
are to Chilean pesos, the legal currency of Chile, and references to "UF" are to
UNIDADES DE FOMENTO. The UNIDAD DE FOMENTO is an inflation-indexed,
peso-denominated monetary unit. The UF rate is set daily in advance based on
changes in the previous month's inflation rate. For December 31, 2001, 1 UF was
equal to Ch$16,262.66. The U.S. dollar equivalent of 1 UF was US$24.84 for
December 31, 2001 using the observed exchange rate.
3.A. SELECTED FINANCIAL DATA
The following tables present our summary financial and operating
information at the dates and for each of the periods indicated. You should read
the following information together with the financial statements for the three
years ended December 31, 2001, including the notes thereto and "Item 5. --
Operating and Financial Review and Prospects" included elsewhere in this annual
report.
The financial statements are prepared in accordance with Chilean GAAP,
which differ in certain important respects from U.S. GAAP. Note 25 to the
financial statements for the three years ended December 31, 2001 provides a
description of the principal differences between Chilean GAAP and U.S. GAAP and
a reconciliation to U.S. GAAP of net income and total shareholders' equity for
the periods and as of the dates therein indicated. Financial data for each of
the three years ended December 31, 1998, 1999 and 2001 and for the period from
January 1, 2000 to October 22, 2000 and as of December 31, 2000 and for the
period from October 23, 2000 to December 31, 2000 in the following tables has
been presented in constant Chilean pesos of December 31, 2001. Selected
financial data has not been provided as of and for the year ended December 31,
1997, as such data cannot be provided without unreasonable effort or expense.
This annual report contains translations of certain Chilean peso amounts
into U.S. dollars at specified rates. Unless otherwise indicated, the U.S.
dollar equivalent for information in Chilean pesos is based on the observed
exchange rate for December 31, 2001. The observed exchange rate reported by the
Central Bank for December 31, 2001 was Ch$654.79 per $1.00. We make no
representation that the Chilean peso or U.S. dollar amounts shown in this annual
report could have been or could be converted into U.S. dollars or Chilean pesos,
at this rate or at any other rate.
2
HQI TRANSELEC
TRANSMISSION BUSINESS (COMBINED) (CONSOLIDATED) HQI TRANSELEC
---------------------------------------------- -------------- ------------------------------------
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE PERIODS FROM AS OF AND FOR THE PERIODS FROM
----------------------------- -------------------------------- ------------------------------------
OCTOBER 23,
JANUARY 1, 2000 2000 TO
DECEMBER 31, DECEMBER 31, TO OCTOBER DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 22, 2000 2000 2001 2001
------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS OF CONSTANT CH$ OF DECEMBER 31, 2001) (IN THOUSANDS OF $)(1)
STATEMENT OF
INCOME DATA:
CHILEAN GAAP:
OPERATING RESULTS:
Net Sales:
Tolls and
transmission
charges......... Ch$80,172,107 Ch$75,941,295 Ch$66,331,710 Ch$16,865,789 Ch$88,249,018 $134,775
Other services.... 7,679,668 8,569,774 2,255,179 642,813 1,709,962 2,611
------------- ------------- ------------- ------------- ------------- --------
Total........... 87,851,775 84,511,069 68,586,889 17,508,602 89,958,980 137,386
------------- ------------- ------------- ------------- ------------- --------
Cost of Sales:
Tolls and
transmission
charges......... (27,412,228) (10,578,060) (7,154,945) (1,594,497) (8,305,128) (12,683)
Other services.... (4,546,870) (4,632,230) (466,011) (261,874) (256,649) (392)
Depreciation and
amortization of
intangibles(2).. (12,604,430) (18,878,002) (19,080,703) (3,874,752) (15,552,918) (23,753)
------------- ------------- ------------- ------------- ------------- --------
Total........... (44,563,528) (34,088,292) (26,701,659) (5,731,123) (24,114,695) (36,828)
------------- ------------- ------------- ------------- ------------- --------
Gross margin...... 43,288,247 50,422,777 41,885,230 11,777,479 65,844,285 100,558
Selling and
administrative
expenses........ (2,389,549) (1,868,935) (1,640,946) (240,227) (2,593,947) (3,961)
------------- ------------- ------------- ------------- ------------- --------
Operating income.. 40,898,698 48,553,842 40,244,284 11,537,252 63,250,338 96,596
NON-OPERATING RESULTS:
Interest income... 2,379,195 1,784,712 2,711,136 419,274 6,967,702 10,641
Non-operating
income(3)....... 550,369 2,528,878 2,567,258 25,927 272,219 416
Amortization of
goodwill........ -- -- -- (1,209,826) (5,436,668) (8,303)
Interest expense.. (15,583,419) (21,455,607) (19,615,965) (5,712,852) (35,731,518) (54,569)
Non-operating
expenses(4)..... (649,628) (3,731,663) (685,234) (131,515) (871,408) (1,331)
Price-level
restatements.... (1,574,043) (8,379,196) (6,449,038) (951,048) (32,894,546) (50,237)
------------- ------------- ------------- ------------- ------------- --------
Non-operating
Results:........ (14,877,526) (29,252,876) (21,471,843) (7,560,040) (67,694,219) (103,383)
INCOME BEFORE
MINORITY INTEREST
AND INCOME TAXES.... 26,021,172 19,300,966 18,772,441 3,977,212 (4,443,881) (6,787)
MINORITY INTEREST...... -- -- -- (405) -- --
INCOME TAXES(5)........ (3,036,719) (2,501,663) (2,775,220) (699,547) (745,329) (1,138)
------------- ------------- ------------- ------------- ------------- --------
NET INCOME............. Ch$22,984,453 Ch$16,799,303 Ch$15,997,221 Ch$3,277,260 Ch$(5,189,210) $(7,925)
============= ============= ============= ============= ============= ========
U.S. GAAP
Net Income N/A Ch$18,969,486 Ch$16,224,312 Ch$2,309,644 Ch$(1,599,730) $(2,443)
============= ============= ============= ============= ============= ========
3
HQI TRANSELEC
TRANSMISSION BUSINESS (COMBINED) (CONSOLIDATED) HQI TRANSELEC
---------------------------------------------- -------------- ------------------------------------
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE PERIODS FROM AS OF AND FOR THE PERIODS FROM
----------------------------- -------------------------------- ------------------------------------
OCTOBER 23,
JANUARY 1, 2000 2000 TO
DECEMBER 31, DECEMBER 31, TO OCTOBER DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 22, 2000 2000 2001 2001
------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS OF CONSTANT CH$ OF DECEMBER 31, 2001) (IN THOUSANDS OF $)(1)
BALANCE SHEET DATA:
Chilean GAAP:
Total assets...... Ch$483,902,782 Ch$502,476,734 N/A Ch$655,823,708 Ch$803,363,180 $1,226,902
Short-term
borrowings...... -- 23,701,189 N/A -- -- --
Shareholders'
equity......... 198,249,124 193,880,753 N/A 323,032,086 317,842,876 485,412
U.S. GAAP:
Total assets...... N/A 472,307,047 N/A 674,401,931 719,166,082 1,098,316
Shareholders'
equity......... N/A 161,221,684 N/A 322,310,190 245,501,661 374,932
OTHER FINANCIAL DATA:
EBITDA Chilean
GAAP(6)......... 53,403,870 66,229,058 61,207,011 15,306,415 78,174,067 119,388
EBITDA U.S.
GAAP(6)........ N/A 67,620,485 60,706,222 15,335,859 78,323,348 119,616
CASH FLOW DATA:
CHILEAN GAAP:
Total cash flow
arising from
operating
activities...... 22,721,245 55,358,850 31,226,845 4,843,793 53,178,881 81,215
Total cash flow
arising from
financing
activities...... (12,685,194) (22,963,678) (64,611,886) 31,912 89,798,945 137,142
Total cash flow
arising from
investing
activities...... (10,077,453) (32,058,520) 33,415,380 (321,494,166) (77,216,295) (117,925)
[Remainder of page intentionally left blank.]
4
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(1) Chilean peso amounts have been translated into U.S. dollars solely for your
convenience at the rate of Ch$654.79 per $1.00, the observed exchange rate
for December 31, 2001.
(2) During the period from January l, 2000 to October 22, 2000, the
transmission business made a review of the asset values related to the
injected assets. For certain fully depreciated assets the residual values
were adjusted to one peso. The effect of this change in estimate was to
increase depreciation expense for the period by Ch$1,834,184 thousand.
(3) During the period from January 1, 2000 to October 22, 2000 non-operating
income included Ch$2,429,575 thousand primarily attributable to the
recognition in income of the final settlement negotiated with Endesa
related to amounts due for basic tolls for prior periods. In 1999 we also
recognized Ch$2,150,054 thousand for the effect of a partial settlement
with Pehuenche for amounts due in prior years.
(4) Due to a significant decrease in the fair value of certain assets, the
transmission business performed a review of property, plant and equipment
during the year ended December 31, 1999 and recorded an impairment
provision of Ch$2,903,739 thousand.
(5) Effective January 1, 2000 we adopted Technical Bulletin No. 60, and we
began recognizing the effects of deferred income taxes for temporary
differences, whether recurring or not, using an asset and liability
approach. This change resulted in a net charge (credit) to income for the
period from January 1, 2000 to October 22, 2000 and from October 23, 2000
to December 31, 2000 of Ch$3,478,823 thousand and Ch$(258,889) thousand,
respectively. See note 4 to our financial statements for the three years
ended December 31, 2001.
(6) EBITDA is calculated by adding interest expense, depreciation and
amortization of goodwill to, and subtracting price-level restatements and
interest income from, income before minority interest and income taxes.
EBITDA is presented because it is a widely accepted indicator of funds
available to service debt, although it is not a Chilean GAAP- or U.S.
GAAP-based measure of liquidity or performance. We believe that EBITDA,
while providing useful information, should not be considered in isolation
or as a substitute for net income as an indicator of operating performance,
or as an alternative to cash flow as a measure of liquidity.
EXCHANGE RATES
Chile's LEY ORGANICA CONSTITUCIONAL DEL BANCO CENTRAL DE CHILE, or the
Central Bank Act, enacted in 1989, liberalized the ability to buy and sell
foreign exchange. Prior to 1989, the law only authorized the purchase and sale
of foreign currency in those cases explicitly authorized by the Central Bank.
Currently, purchase and sale of foreign currency is conducted on a free market
basis.
The Central Bank Act provides that the Central Bank may determine that
certain purchases and sales of foreign exchange specified by law must be carried
out in the Formal Exchange Market. The Formal Exchange Market is formed by the
banks and other entities so authorized by the Central Bank. All payments with
respect to the notes currently are required to be made through the Formal
Exchange Market using currency purchased either in the Formal Exchange Market or
the Informal Exchange Market.
For purposes of determining the exchange rate of certain limited
operations, the Central Bank of Chile sets a reference exchange rate (DOLAR
ACUERDO), taking into account internal and external inflation and reflecting
variation in parities between the Chilean peso and each of the U.S. dollar, the
Japanese yen and the euro. The daily observed exchange rate (DOLAR OBSERVADO)
for a given date is the average exchange rate of transactions in the Formal
Exchange Market on the previous day, as certified by the Central Bank on the
next succeeding business day. The Central Bank is authorized to carry out its
transactions at rates defined by the Central Bank. Generally, however, the
Central Bank carries out its transactions at the spot rate. Authorized
transactions by banks are generally carried out at the spot rate, which usually
fluctuates within a range above or below the reference exchange rate.
Purchases and sales of foreign exchange which may be effected outside the
Formal Exchange Market can be carried out in the Informal Exchange Market, which
is a recognized currency market in Chile. The Informal Exchange Market reflects
transactions carried out at informal exchange rates by entities not expressly
authorized to operate in the Formal Exchange Market such as certain foreign
exchange houses, travel agencies and others. There are no limits imposed on the
extent to which the informal exchange rate can fluctuate above or below the
observed exchange rate. Since 1993, the observed exchange rate and the informal
rate exchange rate have typically been within 1% of each other.
5
The following tables set forth, for the periods and dates indicated,
certain information concerning the observed exchange rate reported by the
Central Bank. No representation is made that the Chilean peso or U.S. dollar
amounts referred to herein could have been or could be converted into U.S.
dollars or Chilean pesos, as the case may be, at the rates indicated or at any
other rate. The Federal Reserve Bank of New York does not report a noon buying
rate for Chilean pesos. On June 26, 2002, the observed exchange rate was
Ch$694.63 per US$1.00.
OBSERVED EXCHANGE RATES (1)
---------------------------
YEAR AVERAGE (2)
- ---- -----------
(Ch$ per US$)
1997................................................ 419.31
1998................................................ 460.29
1999................................................ 508.78
2000................................................ 538.87
2001................................................ 637.57
OBSERVED EXCHANGE
RATES (1)
---------------------------
MONTH LOW (3) HIGH (3)
- ----- --------- ----------
(Ch$ per US$)
December 2001..................................... 654.79 682.11
January 2002...................................... 648.69 683.11
February 2002..................................... 671.86 688.98
March 2002........................................ 655.44 670.67
April 2002........................................ 641.75 662.78
May 2002.......................................... 650.31 656.39
- -----------------
SOURCE: CENTRAL BANK OF CHILE
(1) Reflects Chilean pesos at historical values rather than in constant Chilean
pesos.
(2) Reflects the average rate for each period calculated by using the average
of the exchange rates on the last day of each month during the period.
(3) Exchange rates are the actual high and low, on a day-by-day basis, for each
period.
3.B. CAPITALIZATION AND INDEBTEDNESS
Not applicable
3.C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable
3.D. RISK FACTORS
THIS SECTION IS INTENDED TO BE A SUMMARY OF MORE DETAILED DISCUSSIONS
CONTAINED ELSEWHERE IN THIS ANNUAL REPORT. THE RISKS DESCRIBED BELOW ARE NOT THE
ONLY ONES WE FACE. ADDITIONAL RISKS MAY IMPAIR OUR BUSINESS OPERATIONS. OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE HARMED IF ANY
OF THESE RISKS MATERIALIZES.
RISKS RELATING TO HQI TRANSELEC AND THE CHILEAN TRANSMISSION INDUSTRY
WE MAY BE ADVERSELY AFFECTED BY THE APPLICATION AND INTERPRETATION OF
REGULATIONS THAT COULD AFFECT OUR REVENUES.
We are subject to regulation of our rates and other aspects of our business
in Chile. We recover our investment in transmission assets through tolls which
are charged to generating companies. We determine these tolls according to
guidelines stated in the Chilean Electricity Law, which is designed to provide a
real rate of return. See "Item 4.B. -- Information on the Company -- Business
overview -- Customers, Revenues and Analysis of Charges." The resulting
compensation for our existing assets is not fixed and could be subject to a
decrease due to substantial technological developments or other
6
causes. If the replacement value of our transmission assets decreases
substantially, tolls get diminished, so we may not be able to recoup totally our
past investment cost. We cannot assure you that any tolls we receive will
provide a rate of return sufficient to allow us to meet our obligations and make
planned capital expenditures.
In 1998 and 1999, we conducted arbitration proceedings with some of our
generating customers which resulted in a reduction in the calculation of the
replacement value of our transmission assets by approximately 2.5%. In a future
arbitration proceeding, an arbitral tribunal may lower the calculation of the
replacement value of our transmission assets, thereby lowering our tolls.
The COMISION NACIONAL DE ENERGIA or CNE, (National Energy Commission), the
Chilean regulatory entity that oversees the development of the electricity
sector proposed an amendment to the regulatory framework for the transmission
business in Chile. As a consequence, on May 6, 2002 the Chilean President filed
a draft bill with the CAMARA DE DIPUTADOS or the Chilean House of
Representatives, with a proposal to amend the Chilean Electricity Law. The bill
needs to be discussed and approved by both houses of the Chilean Congress, among
other steps, before becoming a law. Therefore, the final content of the law will
remain undetermined until the end of this process, which may take approximately
one to three years to complete. See "Item 4.B. -- Information on the Company --
Business overview -- Regulatory framework." We cannot assure you that future
developments in the establishment or interpretation of regulations applying to
the sector or in the determination of tolls will be resolved in our favor.
We are also subject to environmental regulations, which, among other
things, require us to perform environmental impact assessments on future
projects and obtain regulatory permits. We cannot assure you that any
environmental impact assessments will be approved by governmental authorities,
that public opposition will not result in delays or modifications to any
proposed project, or that laws or regulations will not change or be interpreted
in a manner that could adversely affect our operations or plans. See "Item 4.B.
- -- Information on the Company -- Business overview -- Regulatory framework."
WE DERIVE THE MAJORITY OF OUR REVENUES FROM A SINGLE CUSTOMER.
We have entered into toll agreements with Endesa and its subsidiaries,
Empresa Electrica Pangue S.A., or Pangue, Empresa Electrica Pehuenche S.A., or
Pehuenche, and Empresa Electrica San Isidro S.A., or San Isidro (collectively
referred to in this annual report as the Endesa group), that will account for a
significant majority of our future cash flow. Approximately 83.0% of our
revenues in 2001 were attributable to the Endesa group. Because we obtain a
substantial part of all our revenue from these toll agreements with the Endesa
group, we may be materially adversely affected by any material change in the
assets, financial condition or results of operations of the Endesa group. These
material adverse effects could result from a prolonged drought (reducing
hydroelectric production), natural disasters or technological changes affecting
the operations of the Endesa group, thereby affecting its ability to pay.
DELAYS OR HIGHER COSTS IN THE CONSTRUCTION OF NEW TRANSMISSION ASSETS MAY
SIGNIFICANTLY AFFECT OUR ABILITY TO RECOVER OUR COSTS FULLY OR MAY RESULT IN
DELAY IN RECEIVING TOLLS IN RESPECT OF NEW LINES.
The success of our program to expand the transmission network will depend
on numerous factors, including the cost and availability of financing. The
construction of new facilities may be adversely affected by factors commonly
associated with construction projects, including delays in obtaining regulatory
approvals; shortages or changes in the price of equipment, materials or labor;
adverse weather conditions; natural disasters; accidents; unforeseen
circumstances and difficulties in obtaining financing at affordable rates. Any
of those factors may cause delays in completion of all or part of our capital
investment program and may affect our ability to recover our costs fully or may
result in delays
7
in receiving tolls in respect of new lines. See "Item 4.B. -Information on the
Company -- Business overview -- Investment agreement with Endesa."
WE FACE OPERATIONAL RISKS IN OUR BUSINESS.
Our business is subject to operational risks, including forces of nature
such as earthquakes, damage to our transmission assets, workers' accidents and
failure of our equipment, any of which may have a material adverse effect on our
business. We cannot assure you that coverage under our insurance policies or our
general resources will be sufficient to cover these risks.
WE HAVE A LIMITED OPERATING HISTORY AS AN INDEPENDENT COMPANY.
We have been operating separately from Endesa, our former parent company,
only since October 2000. Prior to that time, the transmission business we
acquired from Endesa in October 2000 depended on Endesa for certain
administrative functions that Endesa had provided under a service agreement.
During 2001, we engaged in a transition plan designed to develop our own
administrative functions. Although the transition plan has been completed, we
have a limited operating history as an independent company for you to evaluate.
We cannot assure you that we will continue to achieve the goals set out in the
transition plan in an efficient and effective manner in the future.
RISKS RELATING TO CHILE
EXCHANGE RATE INSTABILITY MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Chilean peso has been subject to devaluations in the past and may be
subject to significant fluctuations in the future. A devaluation of the Chilean
peso would negatively affect our results of operations by increasing our cost of
borrowing since the peso cost of interest payments on our U.S. dollar
indebtedness would increase. This increase in the cost of interest payments is
reflected in our financial statements as a charge against operating income and
may result in a restatement loss. See "Item 3.A. -- Key Information -- Selected
financial data -- Exchange rates" and "Item 5.A. -- Operating and Financial
Review and Prospects -- Operating results -- Price-level restatements."
EXCHANGE CONTROL REGULATIONS MAY LIMIT OR HINDER OUR ABILITY TO PURCHASE
U.S. DOLLARS TO MAKE PAYMENTS OF PRINCIPAL OR INTEREST ON OUR INDEBTEDNESS
DENOMINATED IN U.S. DOLLARS.
Our 7-7/8% Senior Notes due 2011, referred to herein as the notes, are
subject to the requirements of the New Compendium (See "Item 10.D. -- Additional
Information -- Exchange controls") which grants the right to make purchases of
U.S. dollars in connection with payment obligations on the notes in the Formal
Exchange Market without an authorization of the Central Bank. However, we cannot
assure you that further Central Bank or New Compendium regulations or
legislative changes to the current foreign exchange control regime in Chile will
allow us to make payments of principal or interest on the notes when such
payments become due and payable.
THE CORPORATE DISCLOSURE, GOVERNANCE AND ACCOUNTING STANDARDS TO WHICH WE
ARE SUBJECT MAY DIFFER FROM THOSE IN THE UNITED STATES.
Under Chilean law, there is less information required to be disclosed about
our business than would be required of public issuers in the United States or
other countries, which may result in investors having less information with
which to monitor and analyze our business.
We prepare our financial statements in accordance with Chilean GAAP. These
principles differ in significant respects from U.S. GAAP as further discussed in
note 25 to our financial statements for the three years ended December 31, 2001
included elsewhere in this annual report. For this and other
8
reasons, the presentation of our financial statements and reported earnings may
differ from that of companies in other countries. In addition, we are only
required to prepare limited periodic U.S. GAAP information reconciled to Chilean
GAAP on an annual basis.
CHANGES IN CHILE'S ECONOMIC SITUATION MAY AFFECT OUR BUSINESS.
All of our operations are located in Chile. Our revenues depend on the
financial health of our customers, which is sensitive to the overall performance
of the Chilean economy. Adverse local, regional or worldwide economic trends
that affect the Chilean economy could have a material adverse effect on our
financial condition and results of operations. In 2001, the Chilean economy grew
at a real rate of approximately 2.8% (according to provisional figures published
by the Central Bank) compared to an expansion of 5.4% in 2000. We cannot assure
you that further growth will be realized in 2002 or that this growth will
continue.
Our financial condition and results of operations could also be materially
affected by changes in economic or other policies of the Chilean government or
other political or economic developments in or affecting Chile, as well as
regulatory changes or administrative practices, over which we have no control.
THE MARKET PRICE OF THE NOTES OR ANY OTHER SECURITIES WE MAY ISSUE IN THE
FUTURE MAY BE AFFECTED BY ECONOMIC DEVELOPMENTS IN OTHER EMERGING MARKET
COUNTRIES.
The market value of securities of Chilean companies is, to varying degrees,
affected by economic and market conditions in other emerging market countries.
Investors' reactions to developments in any of these other countries may have an
adverse effect on the market value of securities of Chilean issuers. The market
value of the notes or any other securities we may issue in the future could be
adversely affected by events elsewhere, especially in emerging market countries.
RISKS RELATING TO THE NOTES
MARKET FOR THE NOTES MAY NOT EXIST.
Although we have been advised that certain market-makers currently make a
market in the notes, they are not obligated to do so, and any such market-making
activities may be discontinued at any time without notice. We cannot assure you
that a public market for the notes will continue to exist. The market price for
our notes may vary depending on many factors, including prevailing interest
rates, our operating results, the markets for similar securities and other
factors beyond our control, including general economic and market conditions.
ITEM 4. INFORMATION ON THE COMPANY
4.A. HISTORY AND DEVELOPMENT OF THE COMPANY
HQI Transelec Chile S.A. is a corporation (SOCIEDAD ANONIMA) organized
under the laws of Chile. We were incorporated on September 15, 2000. We can
trace our history to 1943, when Empresa Nacional de Electricidad S.A., or
Endesa, was incorporated for the generation, transmission and distribution of
electricity in Chile. In the late 1980s, Endesa completed the development of the
Sistema Interconectado Central, referred to in this annual report as the SIC,
the main electricity system in Chile, while continuing to operate as a
vertically integrated company. Endesa was privatized in 1989 after a series of
public offerings.
Transelec was formed in 1993 as a subsidiary of Endesa in order to develop
and operate electricity transmission facilities owned by it and by other
companies. In 1993, Transelec entered into a lease
9
agreement with Endesa, under which Endesa assigned to Transelec the operation of
most of the transmission lines and substations owned by Endesa. The lease was
terminated in May 1998 upon the transfer of certain transmission assets to
Transelec by Endesa, and in June 1998 Transelec entered into a capital lease
with Endesa for the remaining transmission assets which Transelec operated at
the time.
On October 23, 2000, we acquired Transelec. At the same time, Transelec
purchased from Endesa most of Endesa's remaining transmission assets. Our
acquisition of Transelec and the remaining assets Transelec acquired involved
three simultaneous transactions and two cash payments. The three transactions
included (1) acquisition of 100% of all outstanding shares of Transelec (99.99%
acquired by us and 0.01% acquired by Inversiones HQI Chile Holding Limitada, our
parent company), (2) purchase by Transelec of the remaining assets from Endesa,
and (3) extinguishment of the capital lease agreement with Endesa.
The two cash payments made at closing were (1) $537.3 million by us and
Inversiones HQI Chile Holding Limitada for 100% of the shares of Transelec and
(2) $538.6 million by Inversiones HQI Chile Holding Limitada on behalf of
Transelec to extinguish inter-company debt between Transelec and Endesa
consisting of (a) $213.2 million related to the purchase of the remaining
assets, (b) $279.1 million related to the capital lease transaction and (c)
$46.4 million related to the remaining net inter-company obligation of Transelec
to Endesa.
On April 16, 2001, we completed the issuance and sale of UF9.2 million
(approximately $216.6 million as of June 26, 2002) aggregate principal amount of
bonds in Chile. The bonds were issued in two series. The Series A bonds,
aggregate principal amount UF6.0 million, will mature in one installment in 2007
and the Series B bonds, aggregate principal amount UF3.2 million, will amortize
in 30 installments beginning in 2007 and maturing in 2022. On April 17, 2001, we
issued US$465.0 million aggregate principal amount of the notes in a private
offering pursuant to Rule 144A and Regulation S under the Securities Act of
1933, as amended, referred to herein as the Act. On September 5, 2001 we
exchanged US$464.875 million aggregate principal amount of notes for notes that
had been registered under the Act pursuant to a registration statement on Form
F-4, declared effective by the Commission on July 27, 2001. We used the proceeds
of the Chilean bond offering and the issuance and sale of the notes to (1)
retire an inter-company loan payable to Inversiones HQI Chile Holding Limitada,
our parent, amounting to US$538.6 million, including accrued interest, (2) to
advance US$169.4 million as an inter-company loan receivable to Inversiones HQI
Chile Holding Limitada and (3) to pay the expenses of the offering of the notes
and the Chilean bonds.
The inter-company loan payable to Inversiones HQI Chile Holding Limitada
was incurred in connection with our acquisition of the transmission business
from Endesa and its subsidiaries and the payment of the purchase price for
certain transmission assets. The inter-company loan receivable was made
available to Inversiones HQI Chile Holding Limitada in order to repay
indebtedness incurred by it to finance the acquisition of the transmission
business. The aggregate principal amount of, and accrued interest on, this
loan (currently $114.9 million, see "Item 11. -- Quantitative and Qualitative
Disclosures About Market Risk") is payable to us upon demand and periodic
payments of interest, at an annualized interest rate of 7-7/8%, will be made
out of dividends, when and if declared, that we pay to Inversiones HQI Chile
Holding Limitada.
In 2001 we invested $5.7 million updating and maintaining our property,
plant and equipment, including $2.5 million on the replacement of our
Supervisory Control and Data Acquisition system or SCADA. In addition we spent
$10.4 million on projects under our investment agreement with Endesa. See "Item
4.B. -- Information on the Company -- Business overview -- Investment agreement
with Endesa."
10
Our registered office is located at Apoquindo 3721, Piso 6, Las Condes,
Santiago, Chile, and our telephone number is 011-56-2-467-7000. Our agent for
service in the United States is CT Corporation System, 111 Eighth Avenue, New
York, NY 10011.
4.B. BUSINESS OVERVIEW
AS USED IN THIS ANNUAL REPORT, "KV" MEANS 1,000 VOLTS AND "MVA" MEANS ONE
MILLION VOLT AMPERES. REFERENCES TO "MW" ARE TO MEGAWATTS AND REFERENCES TO
"GWH" ARE TO GIGAWATT HOURS. ONE MEGAWATT EQUALS ONE MILLION WATTS. ONE
GIGAWATT-HOUR MEANS THE GIGAWATTS (EACH GIGAWATT REPRESENTING ONE BILLION WATTS
OR ONE THOUSAND MEGAWATTS) OF POWER SUPPLIED OR DEMANDED FOR ONE HOUR.
GENERAL
We are the main owner and operator of the principal electricity
transmission network in Chile. We have a predominant position in providing
transmission services for the SIC, which covers approximately 93.0% of the
Chilean population, from Paposo in the north to the island of Chiloe in the
south of the country. We also provide additional services, such as maintenance
of electricity transmission lines and equipment to electricity generation
companies, electricity distribution companies and large industrial companies
We own the majority of the transmission assets in the SIC. Our transmission
lines connect the main generation plants of the SIC to bulk transmission
substations from which distribution companies take electricity to be delivered
ultimately to final users. The following table provides certain information
concerning our transmission system, including the injected assets, as of the
dates presented.
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 2000 2001
------ ------ ------
(KILOMETERS OF TRANSMISSION LINES)
500 kV........................................................ 498 498 498
220 kV........................................................ 4,219 4,401 4,401
154 kV........................................................ 1,169 1,169 1,205
110 kV........................................................ 532 532 536
66 kV......................................................... 674 674 649
------ ------ ------
Total Kilometers.............................................. 7,092 7,274 7,289
Number of substations (1)..................................... 58 59 59
Transformer capacity (MVA).................................... 7,960 7,960 8021
Total equivalent interruption time (in minutes) (2)........... 2.9 2.4 4.9
Availability of supply (%) (3)................................ 99.991 99.999 99.991
- -----------------
(1) Includes 11 substations owned by third parties, with Transelec equipment.
(2) Total equivalent interruption time (TIEMPO EQUIVALENTE DE INTERRUPCION), or
TEI, represents total non-served energy attributable to the transmission
business or HQI Transelec measured at transmission delivery points,
expressed as equivalent minutes at the peak demand time of the system.
Total TEI attributable to us as well as to other factors was 6.4 minutes in
1999, 6.4 minutes in 2000 and 7.2 minutes in 2001.
(3) Availability of supply is the total percentage of hours that our
transmission delivery points were continuously supplied.
11
THE SIC
The SIC is the main electricity system in Chile. Approximately 61.0% of the
installed generation capacity in the SIC is hydroelectric with the balance being
thermal power plants fueled by coal, fuel oil, diesel or natural gas.
Approximately 75.4% of the electricity generated in Chile in 2001 was produced
in the SIC. The system provides electricity to clients with regulated prices as
well as to clients with unregulated prices. Electricity sales in the SIC grew
steadily from 1991 to 2001 at an average annual rate of 8.9%.
At December 31, 2001, the SIC had an installed capacity of approximately
6,759 MW. The peak demand in 2001 reached approximately 4,694 MW and electricity
consumption was approximately 30,765 GWh. There are currently 18 electricity
generating companies operating within the SIC, although Endesa, Gener and Colbun
are the principal electricity generators. Endesa had a 53.7% market share of
installed capacity in 2001, Gener had 21.9% and Colbun had 16.2%.
SYSTEM PERFORMANCE
We conduct regular assessments of the quality of the services performed by
our transmission system using industry indicators such as equivalent
interruption time, or TEI, and availability of supply. TEI represents total
non-served energy measured at transmission delivery points, expressed as
equivalent minutes at the peak demand time of the system. In 2001, our TEI due
to causes attributable to us was 4.9 minutes down from 14.0 minutes in 1998. TEI
attributable to us are generally caused by equipment failure or human error. Our
historical reduction in TEI resulted from our increased efforts in general
preventive measures and safety standards which reduce TEI thereby improving
reliability. Approximately 32.0% of the total TEI in 2001 resulted from factors
outside of our control such as system faults attributable to other electricity
companies and forces of nature.
We have demonstrated a consistently high level of performance in recent
years, as measured by our availability of supply. The availability of supply is
defined as the total percentage of hours that our transmission delivery points
were continuously supplied.
In 2002, we intend to invest $10.0 million updating and maintaining our
plant and equipment. In addition, we intend to spend $5.8 million on projects
under our investment agreement with Endesa and $5.0 million on other projects
required by the transmission system.
CUSTOMERS, REVENUES AND ANALYSIS OF CHARGES
CUSTOMERS
The majority of our clients are electricity generation companies that use
our transport and transformer capacity and they pay us basic tolls and
additional tolls. We have separate contracts governing our relationship with
each of our clients.
The following table sets forth information regarding our largest customers
for the year ended December 31, 2001.
PERCENTAGE OF OUR
SALES BY TOTAL
CUSTOMER REVENUES (%)
- -------- -----------------
Endesa group (1).......................................... 83
Colbun.................................................... 7
Gener group............................................... 6
12
PERCENTAGE OF OUR
SALES BY TOTAL
CUSTOMER REVENUES (%)
- -------- -----------------
Others.................................................... 4
-----------------
Total..................................................... 100
=================
- -----------------
(1) Endesa (59.0% of our revenues), and its subsidiaries, Pehuenche (15.0% of
our revenues), Pangue (8.7% of our revenues) and San Isidro (0.3% of our
revenues).
ENDESA GROUP. Endesa, including Pangue, Pehuenche, San Isidro and its other
subsidiaries (collectively referred to as the Endesa group), is the largest
electricity generation company in the SIC. The Endesa group owns and operates 19
generation facilities in the SIC, with an aggregate installed capacity at
December 31, 2001 of 3,637.6 MW which constitutes approximately 54.8% of the
SIC's installed capacity. Approximately 76.7% of the Endesa group's installed
capacity in the SIC is hydroelectric, with the remainder thermal electric.
We have toll agreements of an indefinite duration with the Endesa group
that fix the toll amounts that we will charge with respect to each of its power
stations until March 2002. These agreements also specify the basis upon which
the parties will agree on the specific amounts of the tolls after March 2002.
See "Item 5.D. -- Operating and Financial Review and Prospects -- Trend
information." These toll agreements authorize a general review of the factors
comprising the price formula after January 2006, in the case of the basic toll
agreements for our transmission lines, and after October 2012, in the case of
the basic toll agreements relating to the lines that introduce electricity from
power plants to the transmission system. The contract also contemplates
adjustments to take into account changes that result from the enactment of a new
electricity law. Most of the additional toll agreements have the same expiration
dates as the supply agreements between the generators and their customers.
GENER GROUP. The Gener group, including Gener S.A., Sociedad Electrica
Santiago S.A., Energia Verde S.A., Guacolda S.A. and its other subsidiaries,
owns 12 generation facilities in the SIC with an aggregate installed capacity of
1,405.6 MW at December 31, 2001. Approximately 81.0% of the Gener group's
installed capacity is thermal electric and 19.0% hydroelectric.
The amounts of the basic tolls to be charged to the different entities of
the Gener group were fixed by an arbitration court in October 1998 for the
period ending March 2002. See "Item 5.D. -- Operating and Financial Review and
Prospects -- Trend information." We have executed additional toll agreements
with the Gener group, which have the same expiration dates as the supply
agreements between the Gener group and their customers.
COLBUN. Colbun is the third largest generation company in the SIC.
Controlled by Consorcio Electropacifico, Colbun owns four hydroelectric power
plants with an aggregate installed capacity of 728.6 MW and one combined cycle
power plant with an installed capacity of 370 MW.
Pursuant to the decision of an arbitration court in 1999, we have executed
basic toll agreements with Colbun S.A. which fix the price of our tolls until
different dates for each of Colbun's power plants ranging from August 2001 to
October 2003. We have executed additional toll agreements with Colbun, which
have the same expiration dates as the supply agreements between Colbun and its
customers.
REVENUES
Our revenues derive from transmission charges that are intended to be
negotiated periodically with the generation companies. If negotiations fail, the
contracts are subject to arbitration according to the rules provided by the
Chilean Electricity Law.
13
REVENUE ENTITLEMENT UNDER CHILEAN REGULATION
Chilean Electricity Law states that owners of transmission assets
constructed under a concession are obliged to offer open access for the
transmission of electricity and allows the connection of third parties to assets
in the transmission system. Generation companies pay us for these services on
the basis of our investment and operation and maintenance costs. Chilean law
stipulates that compensation for investment should be calculated as an annuity
on the replacement cost of individual transmission assets considering an asset
life of 30 years and a 10.0% rate of return. The replacement cost is referred to
as VALOR NUEVO DE REEMPLAZO, or VNR. The annuity compensation on the VNR is
referred to as the AVNR. In addition, under Chilean law, transmission companies
are also entitled to full compensation for costs incurred in connection with the
operation and maintenance of individual assets (COSTOS DE OPERACION Y
MANTENMIENTO), or COyM. Therefore, we are entitled to annual revenue equal to:
Annual Revenue = AVNR + COyM
VNR CALCULATION. The explicit calculation of the VNR for our individual
transmission assets is not set in the current Chilean Electricity Law, but
rather, is the subject of agreements between us and the generating companies.
Chilean Electricity Law does, however, contain principles regarding the
determination of the VNR for distribution assets in Chile, and we use these
principles as a basis for determining the VNR of our transmission assets.
The VNR for each transmission asset is determined by estimating the
investment cost at actual prices of replacing that asset. This assessment forms
part of the negotiations between us and the generators and is subject to
semi-annual indexation. This indexation is based on pre-defined formulae, which
reflect changes in the various components of the investment costs of
transmission assets and include factors such as inflation and movements in the
U.S. dollar/Chilean peso exchange rate.
At December 31, 2001, our VNR value was approximately Ch$697.2 billion.
The new regulatory framework for the transmission activity ("short law"),
sent to the Chilean congress on May 2002, again includes the concepts of VNR and
COyM. The VNR of the trunk transmission system (named VI in the "short law")
will be calculated every four years by an independent consultant's study,
coordinated by the CNE, the Chilean regulator. The value of the VI from
transmission facilities will include acquisition and installation costs,
regarding the existing physical and technical characteristics of the assets,
valued at current market prices. The annuity of the VI will be calculated
according to the economical life of each type of asset and the 10.0% annual
discount rate.
COYM CALCULATION. We charge COyM as compensation for costs incurred for the
operation and maintenance of transmission assets. In our agreements we have
expressed COyM as a percentage of the VNR for each asset class.
The derivation and basis for COyM for transmission companies is not set in
Chilean Electricity Law, but rather, is negotiated between us and the generation
companies.
REVENUE ALLOCATION UNDER CHILEAN REGULATION
Although our revenues are derived from the calculation of AVNR plus COyM
for the system as a whole, the revenues we receive must be allocated and charged
to the individual generation companies. The determination of what each generator
pays to us is determined by Chilean regulations which specify that we recover
our revenue entitlement through the following three charges:
14
o a transit charge (INGRESO TARIFARIO),
o a basic toll (PEAJE BASICO), and
o an additional toll (PEAJE ADICIONAL).
We can express our total revenue as:
Annual Revenue = AVNR + COyM = transit charge + basic tolls + additional tolls
TRANSIT CHARGE. The transit charge is provided in the Chilean Electricity
Law and refers to the revenue we should receive that is calculated based on the
price of electricity at its introduction in the system and the price of
electricity at its withdrawal at different nodes.
BASIC TOLL. We charge each generating company a basic toll for the use of
transmission assets in the area of influence of each generator's individual
generation stations. Under Chilean law, the area of influence of a power plant
consists of all of the transmission assets that are directly and necessarily
affected by the introduction of energy from that power plant and that connect it
with the closest basic energy substation. The basic energy substation is
determined every six months by the CNE, together with the determination of node
prices. We have contracts with each of our customers governing payments of basic
tolls until 2002 to 2005. As these contracts expire, from the year 2002 on, see
"Item 5.D. -- Operating and Financial Review and Prospects -- Trend
information," they have to be reviewed and new tolls have to be accorded with
the generation companies.
Once the basic toll for an individual transmission asset in the relevant
area of influence is calculated, it is prorated among all users in proportion to
the transmitted power of each generating station within whose area of influence
the transmission asset lies.
ADDITIONAL TOLL. The additional toll is the revenue we receive from
generation companies for their use of our transmission assets outside the area
of influence of the generating company's individual power stations pursuant to
supply agreements between these generators and certain of their customers. The
calculation of the additional toll is identical to the basic toll but takes into
consideration only the transmission lines and installations used by the
generating company to commercialize electricity outside the area of influence of
its power stations. We have contracts with each of our customers governing
payment of additional tolls until 2001 to 2006. Again, as these contracts
expire, they have to be reviewed and new tolls have to be accorded with the
generation companies.
INVESTMENT AGREEMENT WITH ENDESA
At the time of our acquisition of Transelec in October 2000, we entered
into an investment agreement with Endesa relating to our undertaking of several
projects in order to increase transmission capacity in the SIC through 2005. The
principal investments will include the increase in capacity of the network to
accommodate the following projects: construction of the Ralco power plant by
Endesa; construction of the Taltal power plant by Endesa; and Endesa's supply
contract with CGE. In addition, the construction of the Polpaico-Quillota
transmission line is contemplated.
The Ralco plant, which is expected to be operational in 2004, is expected
to be one of the largest hydroelectric facilities in Chile, with a design
capacity of 570 MW and will require expansion of that transmission capacity in
the central zone of the main grid. The Taltal project involves the construction
of transmission lines to transport the output from an additional generation unit
to two existing gas turbine units of 120 MW each belonging to Endesa, after
which all three units will be converted into a combined cycle plant. The
investments relating to CGE entail the capacity expansion necessary to enable
Endesa to perform its obligations under its supply contract with CGE. The
Polpaico-Quillota
15
project is the construction of a permanent transmission line that will replace
an existing old line and an emergency line built during a drought experienced in
Chile in 1998.
Under the agreement, Endesa will send us a letter of intent for each
project it proposes so that both companies may begin establishing the general
conditions for the project. Endesa, however, is under no obligation to request
construction of any specific projects. Nevertheless, if Endesa deems a project
necessary and sends us a letter of intent, we and Endesa will negotiate the
general conditions of the project relating to engineering studies, environmental
permits and other information necessary to arrange a schedule. If we do not
agree sufficiently with Endesa on the construction schedule, Endesa may opt to
carry out the project itself on our behalf, which it will notify us of in
writing immediately. If Endesa and our management agree on the basic conditions,
Endesa will send us an order to proceed according to the previously determined
specifications. Both parties will also determine the basic design of the project
and other technical aspects. If a dispute arises with respect to a technical
matter, the parties will submit to an independent expert for resolution. If
Endesa assumes the project, Endesa will be responsible only for its construction
and we will finance all costs incurred in connection with the specific project
since we will be the owner of the new assets. The implementation of the
investment agreement, nevertheless, remains subject to Endesa's requesting that
we proceed with the construction of projects specified in the agreements.
For each new project requested by Endesa, we, together with Endesa,
determine the contractual AVNR using direct and indirect costs incurred in
connection with the project and the COyM in order to determine our returns from
each investment. Endesa will pay 100% of the AVNR plus COyM agreed to for a
period of 12 years starting from the beginning of operations of the new
installation. If another generation company begins using the new transmission
assets, we will charge them a pro rata fee according, to the general rules for
the distribution of the AVNR among generation companies and give Endesa the
corresponding discount. After the twelfth year, payment will be made
proportionately among users in accordance with the Chilean Electricity Law.
We have already received an order from Endesa to proceed with the following
four projects: (1) the replacement of the 220 kV Quillota-Polpaico transmission
line, (2) the laying of a 220 kV transmission line between Paposo and Diego de
Almagro related to the Taltal plant, (3) an increase in capacity of our network
related to the Ralco power plant and (4) 220 kV Itahue-Ancoa transmission line
project. We have begun engineering work for these projects and began
construction of these assets in mid-2001. The project described in (3) is
already complete and in commercial operation.
In the event that Endesa requires other investments not covered in the
contract, both parties will strive to reach an agreement to carry them out under
the same procedures and standards set forth in the investment contract.
OTHER SERVICES
We provide other services to electricity generation companies, distribution
companies and large industrial companies. We offer maintenance and installation
services for equipment of third parties. In addition, we lease equipment to
other electric companies. Some of the clients to whom we provide these services
include Endesa, Colbun, Transnet and CGE. Revenues derived from providing these
services totaled $1.7 million in 2001 as compared with $2.9 million in 2000. We
expect these revenues to decline in the future.
TRANSITION PLAN
In January 2001 we entered into a transition plan designed to improve our
efficiencies as a separate company through a set of initiatives designed to
streamline our information systems and other operations. Prior to the
implementation of the transition plan, we had depended on Endesa, our former
16
parent company, for certain administrative functions. We completed our
transition plan in the first quarter of 2001 and as of March 31, 2001 the
Administrative Services Agreement with Endesa was no longer in effect.
INSURANCE
We maintain insurance for losses resulting from damage to our assets, fire
or earthquake, business interruption, machinery breakdown, civil liability and
for losses to equipment during transportation. We currently maintain insurance
with Chilena Consolidada Seguros Generales (member of the group Zurich Financial
Services) and Ace Seguros.
REGULATORY FRAMEWORK
The electricity sector in Chile is regulated pursuant to the Chilean
Electricity Law, which was originally enacted in 1982, and its regulations,
enacted by Decree No. 327 of 1998 (collectively referred to as the Chilean
Electricity Law). The organizations that participate in the regulation of the
electricity sector in Chile are:
o MINISTERIO DE ECONOMIA, FOMENTO Y RECONSTRUCCION (Ministry of
Economy),
o COMISION NACIONAL DE ENERGIA, or CNE (National Energy Commission),
o SUPERINTENDENCIA DE ELECTRICIDAD Y COMBUSTIBLES, or SEC
(Superintendent of Electricity and Fuels),
o COMISION RESOLUTIVA (Resolving Committee), FISCALRA NACIONAL
ECONOMICA (Attorney General for Economic Matters), COMISION PREVENTIVA
CENTRAL (Central Prevention Commission) and COMISIONES PREVENTIVAS
REGIONALES (Regional Prevention Commissions)--antitrust organizations,
o CENTRO DE DESPACHO ECONOMICO DE CARGA, or CDEC (Center for Efficient
Load Dispatch),
o COMISION NACIONAL DEL MEDIO AMBIENTE, or CONAMA (National
Environmental Commission), and
o SUPERINTENDENCIA DE VALORES Y SEGUROS, or SVS (Superintendent of
Securities and Insurance).
MINISTERIO DE ECONOMIA, FOMENTO Y RECONSTRUCCION
The Ministry of Economy is responsible for ensuring the modernization,
strengthening and expansion of the Chilean economy and the active role of Chile
in international markets.
In the electricity sector, the Ministry regulates the granting of
concessions to generation companies for hydroelectric facilities and to
transmission and distribution companies for their networks. In addition, it is
responsible for:
o establishing the electricity distribution tariffs,
o setting node prices proposed by the CNE,
o resolving conflicts between members of any CDEC (after receiving CNE's
opinion), and
o issuing final concessions (once it has reviewed a report from the
SEC).
COMISION NACIONAL DE ENERGIA
17
The CNE is an autonomous state entity responsible for coordinating
regulations for the operation and development of all energy sectors in Chile,
including electricity, ensuring that these regulations are implemented, and
advising Chilean governmental organizations in all matters relating to the
Chilean electricity industry.
The CNE is specifically responsible for developing the regulations relating
to the electricity sector and calculating the regulated prices pursuant to
existing legislation. The CNE acts as a technical entity advising the Ministry
of Economy prior to the resolution of conflicts between members of any CDEC.
SUPERINTENDENCIA DE ELECTRICIDAD Y COMBUSTIBLES
The SEC is responsible for reviewing and ensuring compliance with the laws,
regulations and technical standards for generation, production, storage,
transportation or transmission and distribution of liquid fuels, gas and
electricity. The SEC has the authority to impose sanctions and fines for
noncompliance.
The SEC is also responsible for issuing provisional concessions and for
advising the Ministry of Economy of requests made for final and definitive
concessions for the distribution of electricity, and the installation of
hydroelectric power stations, electricity substations and transmission lines. In
addition, the SEC is responsible for monitoring the quality of the services
provided by electricity companies.
ANTITRUST ORGANIZATIONS
Three entities are responsible for regulating and supervising antitrust
issues in Chile. These organizations prevent, investigate and respond to any
actions that may hinder competition and result in abuses of a dominant market
position. These organizations are governed by Decree Law No. 211 (1973), as
stated in Decree No. 511 (1980).
COMISION RESOLUTIVA. The Comision Resolutiva, the resolving committee, is
the highest body responsible for ensuring fair competition in Chile. It is
empowered principally to:
o void any contract or agreement which is contrary to free competition
or issue general standards to which agreements that may affect free
competition must comply, and
o ban individuals found to be exercising anti-competitive practices from
exercising duties in professional associations for a period up to five
years or order the dissolution or amendment of the by-laws of
corporations involved in these types of practices.
FISCALRA NACIONAL ECONOMICA. The FiscalRa Nacional Economica, the
attorney general for economic matters, is responsible for investigating and
prosecuting anti-competitive behavior before the Comision Resolutiva and other
tribunals.
COMISION PREVENTIVA CENTRAL AND COMISIONES PREVENTIVAS REGIONALES. The
COMISION PREVENTIVA CENTRAL or the Central Prevention Commission,
investigates anti-competitive practices which take place in Santiago or in more
than one region. The COMISIONES PREVENTIVAS REGIONALES, or the Regional
Prevention Commissions, investigate anti-competitive practices in specific
regions of Chile.
As part of their tasks, the Comisiones Preventivas may:
o assess existing and potential agreements, which may hinder free
competition,
o ensure that free competition is maintained, and
18
o order the Fiscalia Nacional Economica to investigate acts affecting
free competition.
CENTRO DE DESPACHO ECONOMICO DE CARGA
The CDECs are autonomous entities comprised of the main generation and
transmission companies of each electricity system. The CDECs coordinate the
operations of the power stations and transmission lines that are interconnected
within that electricity system. The CDEC-SIC is made up of the main generation
and transmission companies operating in the Sistema Interconectado Central, or
the SIC (Central Interconnection System). As of December 31, 2001, the
participants of the CDEC-SIC included ten generation companies (Endesa, Gener
S.A., Colbun S.A., Pehuenche, Guacolda S.A, Arauco Generacion S.A., Pangue,
Sociedad Electrica Santiago S.A., San Isidro S.A. and lbener S.A.) and three
transmission companies (HQI Transelec, Sistema de Transmision del Sur S.A. and
Transnet S.A.). Each member has one vote. Resolutions on certain specified
matters that govern the relationship of the members or could result in changes
to the by-laws of the CDEC require unanimity, and resolutions on other matters
require a simple majority of the votes.
The CDECs are governed by Decree No. 327 (1998) issued by the Ministry of
Mining. With respect to electricity transmission, Decree No. 327 established the
CDECs' obligation to provide disclosure of the calculation of transmission
charges, which is likely to result in more certainty regarding toll payments.
The principal responsibilities for the CDECs include:
o defining, for reference purposes, the transmission assets which are
located within the area of influence (consisting of all of the
transmission assets that are directly and necessarily affected by the
introduction of energy from that power plant and that connect it with
the closest basic energy substation) of each power plant,
o calculating, for reference purposes, the value of the basic toll for
each transmission asset using the Valor Nuevo de Reemplazo, or VNR
(actual replacement value of assets), and Costos de Operacion y
Mantenimiento, or COyM (costs incurred in connection with the
operation and maintenance of assets), provided by transmission
companies,
o estimating, for reference purposes, the annual transit charge for each
transmission asset,
o establishing, for reference purposes, the total available capacity for
each transmission system, and
o making available all relevant information regarding transmission
assets including VNR and COyM.
COMISION NACIONAL DEL MEDIO AMBIENTE
CONAMA is responsible for regulating all matters relating to environmental
protection. CONAMA is responsible for managing the evaluation of environmental
impact at a national level, coordinating the processes for creating and setting
environmental standards and establishing the programs necessary to ensure these
standards are met. At each regional level there is a Comision Regional del Medio
Ambiente, or COREMA, which supervises environmental compliance in that region.
Since transmission lines extend through the territory of several regions, we
usually deal directly with the CONAMA.
SUPERINTENDENCIA DE VALORES Y SEGUROS
The SVS is the institution responsible for ensuring compliance with the
laws, regulations and standards applicable to institutions that raise capital
through the Chilean stock exchange, mutual funds, public corporations and
insurance companies.
19
CHILEAN ELECTRICITY LAW
GENERAL
We are subject to regulation of our business in Chile under the Chilean
Electricity Law. The goal of the Chilean Electricity Law is to provide a
simplified regulatory scheme and tariff-setting process which limits the
discretionary role of the government through the establishment of objective
criteria for setting prices in a manner which results in an economically
efficient allocation of resources to and within the electricity sector. In the
case of the transmission business, the Chilean Electricity Law provides the
rules under which the owner of transmission assets must be paid by the
generation companies if there is no agreement among them. The regulatory system
is designed to provide a reasonable rate of return on investment in order to
encourage private investment, while ensuring the availability of electric
service to everyone who requests it.
Pursuant to the Chilean Electricity Law, companies engaged in the
generation and transmission of electricity in Chile must coordinate their
operations through the CDEC to preserve service reliability, minimize the
operating costs of the electric system and ensure open access to the
transmission system Generation companies produce electricity in their power
plants and introduce the electrical energy into the grid according to
determinations made by the CDEC. The CDEC makes its determinations giving
priority to the generation plants producing energy at the lowest marginal cost.
To comply with their supply contracts, the generators withdraw energy from the
grid at the connection points of their respective customers. The introduction
and withdrawal of energy are valued hourly by the CDEC at the marginal cost of
production of the system at each point of introduction or withdrawal (the spot
market).
TRANSMISSION
To the extent that a company's transmission assets were constructed
pursuant to concessions granted by the Chilean government, the Chilean
Electricity Law requires such company to operate these assets on an open access
basis. Users may obtain access to the system by paying a toll or compensation on
the basis of the transmission company's investment and operation and maintenance
costs. The amount of the toll (or the specific components of the formula) may be
negotiated between the transmission company and the generation company. If there
is no agreement, the price must be determined in an arbitration proceeding
according to rules provided by the Chilean Electricity Law. These rules state
that the price should be calculated as an annuity on the replacement cost (VNR)
of individual transmission assets considering an asset life of 30 years and a
10% rate of return. Transmission companies are also entitled to full
compensation for costs incurred in the operation and maintenance of those
individual assets. See "Information on Our Company -- Customers, Revenues and
Analysis of Charges.
CONCESSIONS
The Chilean Electricity Law permits the generation and transmission of
electricity without the need of a concession from the Chilean government.
Transmission companies may apply for a concession to set up electricity
transmission lines and substations from the Chilean government, particularly to
facilitate use of and access to third-party properties. Such third parties are
entitled to compensation, which may be agreed by the parties or, absent
agreement, determined by means of an administrative proceeding that may be
appealed to Chilean courts. All of the relevant electricity transmission lines
we own were established under concessions granted by the Chilean Government.
20
RECENT DEVELOPMENTS
On May 6, 2002 the Chilean President, through the MINISTERIO DE ECONOMIA
FOMENTO Y RECONSTRUCCION (Ministry of Economy) filed a draft bill with the
Chilean House of Representatives, with a proposal to amend the Chilean
Electricity Law. The Chilean Electricity Law currently contains little
regulation as to the transmission of electricity. The bill intends to create a
regulatory framework for this industry. Among others, the bill introduces the
following amendments:
a) Transmission of electricity is considered as a public service.
b) A mechanism is set forth so the CNE, the owner of the network and its
users may agree on future mandatory expansions of the network, the
costs to be included in the toll price.
c) Transmission systems within the different grids are defined.
d) Individual companies operating in any other area of the electricity
industry may not own more than 8.0% of the main transmission network.
Companies generating and distributing electricity may not own more
than 40.0%, in the aggregate, of the total capital of the company that
owns the transmission network.
e) Access to the transmission systems, under certain conditions, cannot
be denied to any user.
f) Toll prices are determined using a mechanism set forth in
the bill, under supervision of the CNE, which considers the
replacement cost of the transmission assets and their repair
and maintenance cost.
g) A mechanism is set forth to interconnect different grids.
h) 50% of the transmission services are paid by electricity generating
companies and the other 50% is paid by distribution companies and
certain clients.
The bill needs to be discussed and approved by both houses of the Chilean
Congress, among other steps, before becoming a law. Therefore, the final content
of the law will remain undetermined until the end of this process, which may
take approximately one to three years to complete. The Chilean Government has
already filed certain amendments to the bill, and further modifications are
expected.
ENVIRONMENTAL REGULATION
The Chilean Constitution of 1980 grants to all citizens the right to live
in an environment free of pollution. It further provides that other
constitutional rights may be limited in order to protect the environment. Our
operations in Chile are subject to Law No. 19,300, or the Chilean Environmental
Law enacted in 1994. The Chilean Environmental Law requires a developer of high
voltage transmission lines and substations either to conduct independent
environmental impact studies of any future projects or activities that may
affect the environment and to submit these studies to the approval of the CONAMA
or to make a sworn statement that its project complies with environmental
regulations. The CONAMA has the authority to subject the developer of
transmission lines to certain duties in order to protect or restore the
environment. Transelec obtained the required approvals from the CONAMA for every
new project built after the effective date of the Chilean Environmental Law. The
Chilean Environmental Law is implemented through REGLAMENTO NO. 30 DEL
MINISTERIO SECRETARRA GENERAL, DE LA PRESIDENCIA of March 20, 1997, or
Regulation No. 30. We apply the guidelines set forth in Regulation No. 30 in
analyzing the development of future projects. Prior to the enactment of the
Chilean Environmental Law and its implementation through Regulation No. 30, we
analyzed the development of our projects using similar guidelines. Furthermore,
in October, 2000, Endesa commissioned the independent firm, Arcadis
Geotecnica, to review Transelec's compliance
21
with current environmental standards. Arcadis Geotecnica concluded that
Transelec was in full compliance with all applicable environmental standards
regarding emission of particulate matter and noise, disposal of industrial
waste, management of surrounding vegetation and fauna and control of dangerous
substances, including polychlorinated biphenyls, or PCBs.
ANTITRUST ISSUES
Decree Law No. 211 prohibits any person from carrying out any act or
agreement or taking any action that may hinder free competition or constitute an
abuse of a dominant position.
In June 1997, while Endesa was Transelec's parent company the Comision
Resolutiva issued Resolution 488 in which, with respect to the transmission
business, among other things, it (1) ordered that Transelec acquire the
transmission assets that we operate, (2) requested that Transelec transform into
a public corporation (SOCIEDAD ANONIMA ABIERTA) that would participate
exclusively in the transmission business and (3) concluded that it was advisable
that Transelec open the share participation to third parties interested in the
expansion of the main transmission grid ("General Instructions 4.2 and 4.3"). In
July 2000 the Fiscalia Nacional Economica, the attorney general for economic
matters, ordered Endesa to include General Instructions 4.2 and 4.3 in the
bidding terms for the sale of Transelec's shares of capital stock and to
incorporate in these bidding terms an obligation for the acquirer of
Transelec's shares of capital stock to notify the Comision Resolutiva, within
60 days of the acquisition, of the measures to be taken in order to comply
with General Instructions 4.2 and 4.3. We, together with Transelec and
Inversiones HQI Chile Holding Limitada, notified the Comision Resolutiva on
December 15, 2000 that we had fully complied with General Instructions 4.2 and
4.3 and that we had not received any expression of interest from companies
interested in expanding the transmission network by participating in
Transelec's ownership since 1997.
4.C. ORGANIZATIONAL STRUCTURE
Currently we have authorized, issued and outstanding 1.0 million shares of
no par value common stock, having one vote per share.
The following table sets forth information with respect to ownership of our
common shares as of December 31, 2001.
SHAREHOLDERS NUMBER OF SHARES % OF TOTAL
- ------------ ---------------- ----------
Inversiones HQI Chile Holding Limitada................................... 999,900 99.99
HQ-Puno Ltd.............................................................. 100 0.01
-------- ------
Total.................................................................... 1,000,000 100.00
========= ======
INVERSIONES HQI CHILE HOLDING LIMITADA
Inversiones HQI Chile Holding Limitada is a Chilean company owned by
HQ-Puno Ltd. (99.99%) and Nattrans Ltd. (0.01%), two Cayman Island companies.
Both companies are indirect subsidiaries of Hydro-Quebec, the electric
utility company owned by Gouvernement du Quebec, Canada.
HQ-PUNO LTD.
HQ-Puno Ltd. is a Cayman Islands company whose stock is owned entirely by
Nattrans Ltd.
22
4.D. PROPERTY, PLANTS & EQUIPMENT
PROPERTIES
Our principal properties consist of transmission lines, substations and
rights of way, all of which are located throughout Chile. At December 31, 2001,
we owned 7,289 kilometers of transmission lines and 8,021 MVA of transformer
capacity. We own a majority of the trunk lines of the SIC, including 100% of the
500 kV transmission lines, approximately 100% of the 154 kV transmission lines
and approximately 72.0% of the 220 kV transmission lines. The remaining
transmission lines are owned by generation, distribution and industrial
companies. In addition, we have 48 substations with total transforming capacity
of 8,021 MVA, in which electric current is transformed into lower voltages for
subsequent distribution. We intend to construct 640 kilometers of additional
transmission lines and upgrade 380 kilometers of transmission lines by 2005 as
part of our ongoing capital expenditures. Apart from the transmission network,
no single property we own produces more than 10.0% of our total revenues. Our
administrative properties and warehouses are located on some of our substations.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
5.A. OPERATING RESULTS
YOU SHOULD READ THIS DISCUSSION IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2001 AND NOTES THERETO AND
OTHER FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. WE PREPARE
OUR FINANCIAL STATEMENTS IN ACCORDANCE WITH CHILEAN GAAP, WHICH DIFFER IN
CERTAIN IMPORTANT RESPECTS FROM U.S. GAAP. SEE NOTE 25 TO OUR FINANCIAL
STATEMENTS FOR A DISCUSSION OF THE PRINCIPAL DIFFERENCES BETWEEN CHILEAN GAAP
AND U.S. GAAP AS THEY RELATE TO US. THIS SECTION CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD LOOKING AS A RESULT OF VARIOUS
FACTORS, INCLUDING WITHOUT LIMITATION THOSE SET FORTH IN "ITEM 3.D. -- KEY
INFORMATION -- RISK FACTORS" AND THE MATTERS SET FORTH IN THIS ANNUAL REPORT.
OVERVIEW
HQI Transelec was formed on September 15, 2000 and had no significant
operations until we acquired Transelec on October 23, 2000. On the same date, we
acquired, through Transelec, most of the remaining transmission assets from
Endesa, the injected assets. Transelec, together with the injected assets, are
collectively referred to in this annual report as the transmission business. The
combined financial statements as of December 31, 1999 and for the period from
January 1, 2000 to October 22, 2000 represent the transmission business and
include the historical financial statements of Transelec and the assets acquired
from Endesa on a carve-out basis. The consolidated financial statements as of
December 31, 2000, and for the period from October 23, 2000 to December 31, 2000
and the financial statements at December 31, 2001 (to the extent relevant)
include our accounts as HQI Transelec and our subsidiary Transelec. On January
18, 2001, HQI Transelec absorbed Transelec, which ceased to exist from that
date.
COMPARABILITY OF FINANCIAL STATEMENTS
The following discussion compares (1) the results of operations of HQI
Transelec for the year ended December 31, 2001 with those of the aggregated
results of operations of the transmission business and HQI Transelec for the
year ended December 31, 2000 and (2) the aggregated results of operations of the
transmission business and HQI Transelec for the year ended December 31, 2000
with those of the transmission business for the year ended December 31, 1999.
The results for the year ended December 31, 2000 consist of the sum of financial
data for the period from January 1, 2000 through October 22, 2000 for the
transmission business and the period from October 23, 2000 through December 31,
2000 for HQI Transelec in order to establish results for the full year 2000 for
comparison purposes. As a result, periods discussed below are not fully
comparable in certain
23
significant respects. See notes 3(a) and 3(b) to our financial statements for
the three years ended December 31, 2001.
NET SALES
Our net sales consist principally of charges for the use of our
transmission system. We charge our customers tolls pursuant to our basic and
additional toll agreements with them. See "Item 4.B. -- Information on the
Company -- Business overview -- Customers, Revenues and Analysis of Charges" for
further information on our revenues and charges. We also receive revenues for
other services we perform, which are complementary to our core business. In 1999
the most important component of other services was revenues from construction
works we performed for Endesa related to the protracted drought in Chile. We did
not perform substantial services in 2001 or in 2000. Other service revenues also
include maintenance and operation of equipment belonging to third parties.
COST OF SALES
Cost of sales consists of operating and maintenance costs related to our
transmission assets, including personnel related to these functions. Cost of
sales also includes depreciation. We calculate depreciation of assets on a
straight-line basis over the estimated useful life of the asset. Our cost of
sales also includes the cost of providing other services.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses consist of our support functions,
including accounting, treasury and administrative services. Endesa has
historically provided most of these services to us under a service agreement,
which reflected market conditions. Our last payment under that administrative
service agreement was made on March 31, 2001. In addition, Synapsis, an
affiliate of Endesa, provided us with information services support and
maintenance of our telecommunication and SCADA equipment under several contracts
that remained in place until December 2001. In January 2001, we undertook a
transition plan designed to permit us to fully operate our administrative
support functions independently of Endesa. The transition plan was completed in
May 2001. In addition, in the first quarter of 2002 an information services
support contract with Synapsis was terminated.
BASIS OF PRESENTATION
We prepare our financial statements in accordance with Chilean GAAP. In
accordance with Chilean GAAP, financial data presented for the three years ended
December 31, 2001 have been restated in constant Chilean pesos of December 31,
2001 to reflect changes in the purchasing power of the Chilean peso due to
inflation. The applicable CPI for accountings purposes in Chile for the year
ended December 31, 2001 was 3.1%. The dollar amounts included in this annual
report are presented solely for the purpose of convenience. As of December 31,
2001, the observed exchange rate was Ch$654.79 per $1.00. This exchange rate
should not be construed as representing that the Chilean peso amounts actually
represent, have been or could be converted into U.S. dollars at that exchange
rate. Certain amounts (including percentage amounts) that appear in this annual
report have been rounded.
Chilean GAAP require that financial statements recognize the effects of
inflation in accordance with Chilean income tax law. Accordingly, all our
financial information, unless otherwise indicated, has been restated to
eliminate the distorting effects of changes in the purchasing power of the
Chilean peso on non-monetary assets and liabilities, in order to present all
information in comparable monetary terms. See note 3(c) to our financial
statements for the three years ended December 31, 2001. The general price-level
gain or loss reflected in the income statement indicates the effect of inflation
on our net holdings of monetary assets and liabilities during a period of
inflation. Assets and liabilities are
24
considered monetary for purposes of general price-level accounting if their
amounts are fixed by contract or otherwise in terms of numbers of currency
units, regardless of changes in specific prices in the general price-level.
Examples of monetary assets and liabilities include accounts receivable,
accounts payable and cash.
Chilean GAAP differ in certain important respects from U.S. GAAP. Note 25
to our financial statements for the three years ended December 31, 2001
describes the principal differences between Chilean GAAP and U.S. GAAP as
applied to us. Net income on a U.S. GAAP basis differs from that reported in
accordance with Chilean GAAP principally due to differences (1) in accounting
for the acquisition by HQI Transelec of the transmission business resulting in
different values for property, plant and equipment and goodwill and (2) in the
treatment of deferred income taxes under Chilean GAAP compared to the treatment
prescribed by Financial Accounting Standards No. 109.
PRICE-LEVEL RESTATEMENTS
Under Chilean GAAP we are required to restate non-monetary assets and
liabilities, UF and foreign currency-denominated assets and liabilities,
shareholders' equity and income and expense accounts, to reflect the effect of
variations in the purchasing power of the Chilean peso. See note 3(c) to our
financial statements for the three years ended December 31, 2001.
Price-level restatement can have a significant effect on our net income.
The amount of price-level restatement for any period will primarily depend on
the amount and composition of dollar-denominated monetary assets and liabilities
and on the amount of peso-denominated monetary assets and liabilities. Any
mismatch between the amount of assets and liabilities in dollars will generate
price-level restatement gains or losses, depending upon the structure of the
mismatch and the movement of the exchange rate between the U.S. dollar and the
peso. To the extent the company has peso-denominated monetary assets in excess
of peso-denominated monetary liabilities, inflation in Chile will generate a
price-level restatement loss. In addition, to the extent the company has assets
and liabilities in UF, and there is a mismatch, the company is exposed to gains
or losses on price-level restatements. As described in "Item 4.B. -- Information
on the Company -- Business overview -- Customers, Revenues and Analysis of
Charges -- Revenues," our revenues incorporate indexation for inflation and
changes in the U.S. dollar/Chilean peso exchange rate.
Because we have a high level of dollar-denominated debt relative to our
dollar-denominated assets, the real devaluation of the Chilean peso against the
dollar, absent hedging, results in us having restatement loss. Due principally
to the effect of the real depreciation of the peso against the dollar during the
year ended December 31, 2001, we were required to take a charge against
operating income of Ch$30,079 million. We continue to explore hedging
arrangements which we expect will allow us to minimize the effect of peso
depreciation, should any occur, in future periods.
The following table sets forth, for the periods indicated, variations among
CPI, UF and the U.S. dollar appreciation against the Chilean peso:
YEAR ENDED DECEMBER 31,
-------------------------
1999 2000 2001
---- ---- ----
(EXPRESSED IN %)
CPI variation (with "prior month" rule) 2.6 4.7 3.1
UF variation 2.6 4.7 3.1
U.S. dollar appreciation against peso 12.2 8.2 14.1
25
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
The following discussion compares the results of operations for the year
ended December 31, 2001 with the aggregated results of operations of the
transmission business and HQI Transelec for 2000. The aggregated results of
operations for 2000 consist of the sum of financial data for the period from
January 1, 2000 through October 22, 2000 for the transmission business and the
period from October 23, 2000 through December 31, 2000 for HQI Transelec in
order to establish results for the full year 2000 for comparison purposes. As a
result, periods discussed below are not fully comparable in certain significant
respects.
NET SALES. Net sales increased to Ch$89,959 million in 2001 from Ch$86,095
million in 2000. Net sales from tolls and transmission charges increased to
Ch$88,249 million from Ch$83,198 million in 2000. This increase was primarily
due to the devaluation of the peso during 2001, which resulted in a higher
collection of revenues in Ch$ because the tolls are contracted in US$, but
invoiced at the monthly current exchange rate. That increase was partially
offset by the application of the results of the indexation formulas over the
tolls, and by the lower monetary correction applied to the revenues during 2001,
compared with that correction applied during 2000. Net sales from other services
were Ch$1,710 million in 2001 compared to Ch$2,898 million in 2000.
COST OF SALES. Cost of sales decreased to Ch$24,115 million in 2001 from
Ch$32,433 million in 2000. The decrease in cost of sales was due primarily to a
decrease in depreciation. Cost of sales in 2001 included Ch$15,553 million in
depreciation of property, plant and equipment, and amortization of intangibles,
compared to Ch$22,955 million in 2000. This decreased depreciation in 2001 was
attributable primarily to an extension of the estimated useful lives of the
transmission assets described in note 3(i) to our financial statements for the
three years ended December 31, 2001.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased to Ch$2,594 million in 2001 from Ch$1,882 million in 2000. This
increase was due primarily to the implementation of our transition plan, a
higher payroll to support administrative functions, and the new ownership
structure of Transelec.
OPERATING INCOME. Operating income increased to Ch$63,250 million in 2001
from Ch$51,782 million in 2000. The increase in operating income was primarily
due to the increase in net sales and the decrease in cost of sales described
above.
INTEREST INCOME. Interest income increased to Ch$6,968 million in 2001 from
Ch$3,130 million in 2000. This income consists of interest earned by Transelec
on cash deposits, securities purchased for resale, and the inter-company loan.
The inter-company loan receivable issued to HQI Inversiones Chile Holdings
Limitada by Transelec in early of 2001 largely created the increase in interest
income during 2001.
NON-OPERATING INCOME. Non-operating income decreased to Ch$272 million in
2001 from Ch$2,593 million in 2000, reflecting the absence, during 2001, of the
extraordinary gain resulting from Transelec's arbitration with Endesa
received in 2000, related to the payments of basic tolls for prior periods.
AMORTIZATION OF GOODWILL. We amortized Ch$5,437 million in goodwill in 2001
compared to Ch$1,210 in 2000 as a result of the acquisition of the transmission
business by us on October 23, 2000. This increase is primarily due to the fact
that we amortized goodwill over the full year in 2001 as opposed to the period
from October 23, 2000 to December 31, 2000.
26
INTEREST EXPENSE. Interest expense increased to Ch$35,732 million in 2001
from Ch$25,329 million in 2000. This increase was primarily due to the increased
interest expense associated with the notes and the Chilean bonds issued during
2001.
NON-OPERATING EXPENSES. Non-operating expenses increased to Ch$871 million
from Ch$817 million in 2000. Non-operating expenses in 2001 were comprised
mainly of losses associated with the recognition of expenses resulting from the
development of information systems that we decided not to deploy because, after
the acquisition of the transmission business, these systems were incompatible
with our current needs. In 2000, non-operating expenses consisted mainly of
severance and accrued vacation payments, adjustment for a prior year income tax
payment as well as a loss on the sale of property, plant and equipment.
PRICE-LEVEL RESTATEMENTS. Price-level restatements resulted in a
restatement loss of Ch$32,895 million compared to a restatement loss of Ch$7,400
million in 2000. In both years, losses related primarily to the effect of the
real depreciation of the peso against the dollar on our dollar-denominated debt.
In addition, during 2001 we recognized a restatement loss of Ch$9,503 as the
accounting result of exchange rate swap contracts entered into in the second
half of 2001 for approximately $170.0 million. See "Item 11. -- Quantitative and
Qualitative Disclosures About Market Risk." This effect was not present in 2000.
INCOME TAXES. Income taxes decreased to Ch$745 million in 2001 from
Ch$3,475 million in 2000. At December 31, 2001, we have not recognized an income
tax expense due to tax losses amounting Ch$17,043 million. Nonetheless, as a
result of the merger with Transelec, in March 2001 we paid income taxes
amounting to Ch$1,248 million, corresponding to the taxable income of Transelec
during January 2001. This payment was offset by the deferred taxes accounted for
during 2001. The income taxes recognized in 2000 were based on the taxable
income calculated for that period.
NET INCOME. As a result of the foregoing, there was a net loss of Ch$5,189
million compared to net income of Ch$19,275 million in 2000.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
The following discussion compares the aggregated results of operations of
the transmission business and HQI Transelec for 2000 with those of the
transmission business for 1999. The aggregated results for 2000 consist of the
sum of financial data for the period from January 1, 2000 through October 22,
2000 for the transmission business and the period from October 23, 2000 through
December 31, 2000 for HQI Transelec in order to establish results for the full
year 2000 for comparison purposes. As a result, periods discussed below are not
fully comparable in certain significant respects.
NET SALES. Net sales increased to Ch$86,095 million in 2000 from Ch$84,511
million in 1999. Net sales from tolls and transmission charges increased to
Ch$83,198 million in 2000 from Ch$75,941 million in 1999. The difference
partially reflects an increase in our transmission assets in 2000, thereby
increasing our rate base. Net sales in 1999 reflect a number of events,
including the results of the arbitration decisions for Gener and Colbun in 1998
and 1999, respectively. The application of the methodology that emerged from the
arbitration with Colbun to contracts with Endesa, Pangue and Pehuenche, also
affected net sales in 1999. With respect to revenues from Colbun, overcharges in
1998 were deducted in 1999, resulting in lower net sales. In addition, amounts
which would have been expected to be collected in 1999 from Pangue and Pehuenche
were not collected. A final settlement with the Endesa group with respect to
prior years was reached in May 2000. For a discussion of the arbitration
proceedings, see "Item 4.A. -- Information on the Company -- Business overview
- -- Customers, Revenues and Analysis of Charges - Revenues." Net sales in 2000
reflect full contracted amounts. Net sales from other services were Ch$2,898
million in 2000 compared to
27
Ch$8,570 million in 1999. We also received substantial revenue from Endesa in
1999 from construction works we performed for Endesa related to the protracted
drought in Chile. We did not perform substantial services in 2000.
COST OF SALES. Cost of sales decreased to Ch$32,433 million in 2000 from
Ch$34,088 million in 1999. The decrease in cost of sales was due primarily to
the substantial decrease in net sales in 2000 of revenues from construction
services performed for Endesa in 1999 but not in 2000. Cost of sales in 2000
included Ch$22,955 million in depreciation of property, plant and equipment, and
amortization of intangibles, compared to Ch$18,878 million in 1999. Increased
depreciation in 2000 related to (1) depreciation resulting from a change in
estimate of residual basis of certain injected assets prior to our acquisition
of the transmission business, (2) depreciation of new property, plant and
equipment and (3) depreciation resulting from the step-up in basis of the
injected assets.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
remained relatively stable at Ch$1,882 million in 2000 and Ch$1,869 million in
1999. Selling and administrative expenses in 1999 and 2000 related mainly to the
payment of fees to Endesa under the service agreement described under "--
Overview -- Selling and Administrative Expenses."
OPERATING INCOME. Operating income increased to Ch$51,782 million in 2000
from Ch$48,554 million in 1999. The increase in operating income was primarily
due to the decrease in cost of sales described above.
INTEREST INCOME. Interest income increased to Ch$3,130 million in 2000 from
Ch$1,785 million in 1999 due primarily to our investment in time deposits in
2000 and an increase in marketable securities, which generated additional
income.
NON-OPERATING INCOME. Non-operating income increased to Ch$2,593 million in
2000 from Ch$2,529 million in 1999. In 2000, non-operating income was primarily
due to the recognition of income from the final settlement negotiated with
Endesa related to amounts due for basic tolls for prior periods. In 1999 we
recognized the effect of a partial settlement with Pehuenche for amounts due in
prior years
AMORTIZATION OF GOODWILL. We amortized Ch$1,210 million in goodwill in 2000
as a result of the acquisition of the transmission business by us on October 23,
2000.
INTEREST EXPENSE. Interest expense increased to Ch$25,329 million in 2000
from Ch$21,456 million in 1999. Indebtedness in 1999 and the period from January
1, 2000 through October 22, 2000 consisted mainly of a capital lease with Endesa
relating to the transfer to us of certain assets from Endesa in 1998 and
interest expense related to the indebtedness attributable to the injected
assets. In connection with our acquisition by Hydro-Quebec on October 23, 2000,
the indebtedness to Endesa was repaid and we entered into a letter agreement in
the amount of $538.6 million with our new parent company, Inversiones HQI Chile
Holding Limitada, which bore a higher interest rate than the capital lease with
Endesa. Therefore, interest expense for the period from October 23, 2000 through
December 31, 2000 was Ch$5,713 million.
NON-OPERATING EXPENSES. Non-operating expenses were Ch$817 million in 2000
and Ch$3,732 million in 1999. Non-operating expenses in 1999 resulted primarily
from the recognition of an impairment in property, plant and equipment and
obsolescence of inventory. Non-operating expenses in 2000 consisted mainly of
severance and accrued vacation payments, adjustment for a prior year income tax
payment as well as a loss on the sale of property, plant and equipment.
PRICE-LEVEL RESTATEMENTS. Price-level restatements resulted in a
restatement loss of Ch$7,400 million in 2000 as compared to a restatement loss
of Ch$8,379 million in 1999. In both years,
28
restatement losses related primarily to the effect of the real depreciation of
the peso against the dollar on our dollar-denominated debt.
INCOME TAXES. Income taxes increased to Ch$3,475 million in 2000 from
Ch$2,502 million in 1999. This increase was due primarily to a change in Chilean
GAAP under which Chilean companies are now required to recognize deferred income
taxes arising from temporary differences between the basis of assets and
liabilities for tax and financial statement purposes.
NET INCOME. As a result of the foregoing, net income increased to Ch$19,275
million in 2000 from Ch$16,799 million in 1999.
5.B. LIQUIDITY AND CAPITAL RESOURCES
Net cash flow from operations was Ch$53,179 million, Ch$36,071 million and
Ch$55,359 million in 2001, 2000 and 1999, respectively. The increase in net cash
flow from operations in 2001 compared to 2000 was mainly due to an increase in
cash available at year end resulting from the semi-annual interest payment
schedule on the notes and the Chilean bonds versus the monthly interest payment
schedule on the repaid inter-company loan payable to HQI Chile Holding Limitada
and to the effect of the devaluation of the Chilean peso on the revenues
expressed in dollars. The decrease in net cash flow from operations in 2000
compared to 1999 reflects the increase of the accounts receivable levels in 2000
from 1999. In 1999, we received in cash amounts owing to us from prior years in
respect of settlements and arbitration awards from generators.
At the time of our acquisition of Transelec in October 2000, we entered
into an investment agreement with Endesa relating to our undertaking of several
projects in order to increase transmission capacity in the SIC. The principal
investments will include the increase in capacity of the transmission network to
accommodate the following projects: construction of the Ralco power plant by
Endesa; construction of the Taltal power plant by Endesa; and Endesa's supply
contract with CGE. The construction of the Polpaico-Quillota transmission line
is also one of the projects. The current estimated cost of these capital
expenditures, from 2002 to 2005, is $188.0 million. During 2001, we invested
$10.3 million in these projects. As of June 28, 2002, we are committed to spend
$109.5 million on these projects.
Other projects that are part of our increase of capacity program (VNR
projects), but are not part of the agreement with Endesa and which we are not
yet required by contract to undertake, have an estimated cost of $116.0 million.
In addition, our capital expenditure program includes investments to renovate,
improve and maintain the performance of our transmission systems (non-VNR
projects). During 2001 we invested $5.7 million in these areas mainly in regards
to the replacement of our SCADA system. Other non-VNR projects in which we
intend to invest are the improvement of operating data in substations, the
replacement of security facilities, the improvement of the towers in some high
voltage transmission lines and the replacement of some microwave connections.
For the period 2002 to 2005 this program has an estimated cost of $34.0 million.
We intend to finance these capital expenditures with cash flow from
operations, which we believe will be sufficient to meet our capital expenditure
requirements.
On April 16, 2001 we completed the issuance and sale of UF9.2 million
(approximately $216.6 million as of June 26, 2002) aggregate principal amount of
bonds in Chile. The bonds were issued in two series. Series A bonds, aggregate
principal amount UF6.0 million, will mature in one installment in 2007 and the
Series B bonds, aggregate principal amount UF3.2 million, will amortize in 30
installments beginning in 2007 and maturing in 2022. The Chilean bonds contain
certain financial covenants that require us to maintain certain levels of assets
to debt, debt to capitalization and a minimum shareholder's equity of UF15
million.
29
On April 17, 2001 we completed the issuance and sale of the outstanding
notes in the aggregate principal amount of $465.0 million. We used the proceeds
from the issuance of the outstanding notes, along with some of the proceeds from
the issuance of the Chilean bonds to repay the $538.7 million inter-company loan
payable owed to our parent Inversiones HQI Chile Holding Limitada.
5.C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
Not applicable.
5.D. TREND INFORMATION
The 2002 toll report, issued by CDEC-SIC in January 2002, treated some
paths of the transmission network as not suitable for basic toll treatment.
Those paths were considered by the CDEC-SIC as paths which required additional
tolls. However, the toll report did not specify how those paths would be
remunerated to us nor which generation company should pay those additional
tolls. Some generation companies determined that they did not have to pay any
tolls for those paths. The CDEC-SIC expert committee recommended that the paths
in controversy should be remunerated as additional tolls. That proposition was
rejected by the CDEC-SIC Directory. The dispute was presented to the Economy and
Energy Minister, who has yet to issue a final resolution. We expect that the
ministry's resolution will confirm the expert committee position, in the sense
that all transmission paths must have their corresponding revenues. In the case
of an adverse resolution of the controversy against our interests, the toll
revenues for the year 2002 will be 11.5% lower than in 2001, valued in Chilean
pesos.
In addition, "Item 5.A -- Operating and Financial Review and Prospects --
Operating results" is incorporated in this "Item 5.D. Operating and Financial
Review and Prospects -- Trend information" by reference.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A. DIRECTORS AND SENIOR MANAGEMENT
We are managed by our board of directors, which in accordance with our
by-laws is comprised of five directors who are elected every three years.
Cumulative voting is permitted for the election of directors. Under our by-laws,
a substitute director for each director is selected by the shareholders
annually. If a vacancy occurs, the substitute director fills the vacancy until
the next regularly scheduled meeting of shareholders, at which time the entire
board of directors will be elected or re-elected. The current board of directors
was appointed during the Ordinary Shareholders' Meeting held on April 23, 2002.
Of the five current members of our board of directors, four are also employees
of Hydro-Quebec.
The by-laws require that directors meet at least once a month.
Extraordinary board meetings are called when summoned by the president of HQI
Transelec or when directed by at least three directors.
Our current directors are as follows:
NAME POSITION APPOINTED
- ---- -------------- --------------
Yves Filion....................................................... President April 23, 2002
Jacques Regis..................................................... Vice-President April 23, 2002
Maurice Charlebois................................................ Director April 23, 2002
Gilles Marchand................................................... Director April 23, 2002
Pedro Lizana Greve................................................ Director April 23, 2002
30
YVES FILION. Mr. Filion is the President of the board of directors. He has
been Deputy Chief Executive Officer of Hydro-Quebec since 1996. From November
1999 to August 2000, he also managed Hydro-Quebec's transmission division,
TransEnergie. He was Chief Financial Officer of Hydro-Quebec from 1996 to 1998.
Mr. Filion is Chairman of the Board of the Centre d'Innovation Sur le Transport
d'Energie du Quebec. He has a degree in Applied Science from the Universite de
Sherbrooke.
JACQUES REGIS. Mr. Regis is the Vice-President of the board of directors.
He has been President of TransEnergie, Hydro-Quebec's transmission division,
since 1997. From 1996 to 1997, Mr. Regis had been Executive Vice-President of
the Generation, Transmission and Distribution Group of Hydro-Quebec. He is
Chairman of the Board of Directors of Cedars Rapid Transmission Company and
represents Canada on the Management Committee of North-American Electricity
Reliability Council. He has a bachelor's degree in Science, a master's degree in
Materials Chemistry from the Universite de Montreal and a diploma in
Administration from HEC in Montreal, Canada.
MAURICE CHARLEBOIS. Mr. Charlebois is a member of the board of directors.
Before joining Hydro-Quebec as Vice President Human Resources, Mr. Charlebois
served as Associate Secretary for Labor Relations (public and semipublic
sectors) at the Secretariat du Conseil du Tresor, from 1995 to 2000. In this
capacity, he was the Quebec government's chief negotiator, directing all
public-sector negotiations and responsible for establishing their terms of
reference. Mr. Charlebois holds a degree in economics from the Universite du
Quebec a Montreal.
GILLES MARCHAND. Mr. Marchand is a member of the board of directors. He has
been General Counsel of Hydro-Quebec since 1993. Since 1999, he has also held
the position of Director-Industrial Security. Mr. Marchand has a law degree from
the Universite de Montreal.
PEDRO LIZANA GREVE. Mr. Lizana is a member of the board of directors. He
was President of the Sociedad de Fomento Fabril of Chile from 1993 to 1997. He
is a director of various Chilean companies, including Empresa Electrica de
Santiago S.A. and Compania Chilena de Medidores S.A. Mr. Lizana has a degree in
Business Administration from the Universidad de Chile.
MANAGEMENT
Our officers are appointed by the board of directors and hold office at its
discretion. Our senior management is comprised mainly of former employees of
Endesa, all of whom have considerable experience in the electricity industry.
Our current management is as follows:
NAME POSITION APPOINTED
---- ------------------------------ ----------------
Guillermo Espinosa Ihnen..................... Chief Executive Officer October 23, 2000
Denis Pelletier.............................. Deputy Chief Executive Officer June 18, 2001
Real Paul-Hus................................ Finance Manager January 30, 2001
Hernan Casar Collazo......................... Project Manager January 15, 2001
Fernando A. Abara Elias...................... General Counsel October 23, 2000
Eduardo A. Andrade Hours..................... Operations Manager October 23, 2000
Jose A. Valdes Carmona....................... Commercial Manager October 23, 2000
Julian Nino De Miguel........................ Human Resources and October 23, 2000
Administration Manager
GUILLERMO ESPINOSA IHNEN. Mr. Espinosa is our Chief Executive Officer. He
joined Transelec in 1994 as Commercial Manager after being with Endesa for
several years as Operations Manager and Commercial Manager. In 1996, he was
appointed Transelec's Operations Manager, a position he held for one year before
assuming his current position of CEO. Mr. Espinosa has a degree in Engineering
31
from the Universidad de Chile and has taken advanced engineering courses at
Massachusetts Institute of Technology.
DENIS PELLETIER. Mr. Pelletier is our Deputy Chief Executive Officer. He
joined Hydro-Quebec in 1972 and has held various positions, including Managing
Director at the Hydro-Quebec Research Institute, Manager of the Gentilly 2
nuclear plant and other managing positions. Mr. Pelletier has a degree in
Mechanical Engineering from the Universite Laval in Quebec, Canada.
REAL PAUL-HUS. Mr. Paul-Hus is our Finance Manager. He has worked at
Hydro-Quebec's financial department since 1980. Mr. Paul-Hus has completed
various assignments with Hydro-Quebec International related to finance in
various parts of the world. He was appointed our Treasurer in December 2000 and
our Finance Manager in January 2001. Mr. Paul-Hus has a degree in Electrical
Engineering from the Ecole Polytechnique in Montreal, Canada, and an M.B.A. from
Harvard University.
HERNAN A. CASAR COLLAZO. Mr. Casar is our Project Manager. He had been at
Endesa since 1970 in different positions related to electrical engineering until
he was transferred to Transelec, developing, different transmission projects. In
2000 he returned to Endesa as Project Manager for the second Interconnection
Brazil-Argentina transmission line contract. Mr. Casar has a degree in
Engineering from the Universidad de Santiago de Chile.
FERNANDO A. ABARA ELIAS. Mr. Abara is our General Counsel. He has held this
position since 1993 following seven years at Endesa's legal department. Mr.
Abara is also a professor of Economic Law at Pontificia Universidad Catolica de
Chile and has taken substantial training related to the Chilean electricity
market. Since 1996, he has also acted as Secretary of the Board of Directors. He
has a law degree from the Universidad Catolica de Valparaiso in Chile and a
master's degree in Economics and Management for lawyers.
EDUARDO A. ANDRADE HOURS. Mr. Andrade is our Operations Manager. He has
been with Endesa since 1985 as Project Manager in a wide variety of initiatives
until he was transferred to Transelec in 1993 as Head of Commercialization and
later as Operations Manager. Prior to joining Endesa, Mr. Andrade worked in the
telecommunications industry. He has an M.B.A. from the Universidad Adolfo
Ibarez in Chile and a degree in Electrical Engineering from the Universidad
de Chile.
JOSE A. VALDES CARMONA. Mr. Valdes is our Commercial Manager. He joined
Transelec in 1993 when he was appointed Business Development Manager. In 1996,
he was appointed Commercial Manager. Prior to joining Transelec, he worked for
Colbun as Business Development Manager and, prior to that for the finance
department of the Chilean Ministry of Justice. He has a degree in Industrial
Engineering from the Universidad de Chile and has taken courses in project
evaluation and corporate finance.
JULIAN E. NINO DE MIGUEL. Mr. Nino is our Human Resources and
Administration Manager. He began working for Endesa in 1990 as Treasurer. In
1992, he worked for Central Costanera, and, in 1993, was appointed Chief
Financial Officer for Hidroelectrica El Chocon and, in 1999 for Generacion
Argentina, all of which are located in Argentina. In April 2000, he was
appointed Administration Manager of Transelec. Mr. Nino has a degree in
Commercial Engineering from the Universidad de Concepcion and a B.A. in business
from the Universidad Adolfo Ibanez, both of which are located in Chile.
6.B COMPENSATION
Directors are paid a fee for attending meetings of the board of directors.
Four of our five directors, who are also employees of Hydro-Quebec, have
renounced the fee for attending meetings of our board
32
of directors. For the year ended December 31, 2001, we paid an aggregate amount
of compensation of Ch$601,278 thousand to all directors and officers. Other
non-cash benefits in 2001 included reimbursement of expenses associated with
medical insurance policies for our executive officers and the use of our cars
during non-working hours. There are no outstanding loans granted by us to our
executive officers or members of our board of directors. We are not required
under Chilean law to disclose on an individual basis the compensation of our
directors and executive officers, and we do not otherwise publicly disclose this
information. We do not maintain any pension or retirement programs for our
directors or executive officers.
6.C BOARD PRACTICES
Our directors are appointed for an initial term of three years. The current
terms of all our directors expire on April 23, 2005. Under our by-laws, a
substitute director for each director is selected by the shareholders annually.
If a vacancy occurs, the substitute director fills the vacancy until the next
regularly scheduled meeting of shareholders, at which time the entire board of
directors will be elected or re-elected. The current board of directors was
appointed during the Ordinary Shareholders' Meeting held on April 23, 2002. Of
the five current members of our board of directors, four are also employees of
Hydro-Quebec.
The board of directors has approved a Code of Ethics for Directors and
Executives, which establishes that without prejudice to legislation governing
the matter, our directors and executives must adhere to the precepts of the
Code, whose goal is to ensure that they maintain the highest corporate ethical
standards and management. The Corporate and Management Ethics Committee is
responsible for implementing and interpreting this Code. The members of this
committee are directors Gillles Marchand, Pedro Lizana and the Secretary of the
Board of Directors, Fernando Abara.
6.D EMPLOYEES
Our workforce at December 31, 2001 consisted of 264 full-time employees.
The following table provides a breakdown of our employees by category.
AT DECEMBER 31,
2001
---------------
Executive officers..................................................... 8
Supervisors............................................................ 20
Professionals (including engineers, accountants and attorneys)......... 94
Technicians............................................................ 112
Clerical and others.................................................... 30
---------------
Total............................................................. 264
===============
We also employ independent contractors for the performance of many of our
activities not related to our core business, such as maintenance of transmission
lines and equipment, security and our internal communications network.
Approximately 70.0% of our employees are represented by one of two unions.
Our labor relations with unionized employees are governed by collective
bargaining agreements which will expire in 2002, 2003 and 2004 and which
establish the level of compensation and other benefits of each employee. We
believe that our relationship with our employees is generally good.
6.E. SHARE OWNERSHIP
Not applicable.
33
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A. MAJOR SHAREHOLDERS
"Item 4.C. -- Information on the Company -- Organizational structure" is
incorporated into this "Item 7.A. -- Major shareholders" by reference.
7.B. RELATED PARTY TRANSACTIONS
We have engaged in certain transactions with related parties. See note 20
to our financial statements for the three years ended December 31, 2001.
INTER-COMPANY LOAN PAYABLE TO INVERSIONES HQI CHILE HOLDING LIMITADA
In connection with our acquisition of the transmission business from Endesa
and its subsidiaries in October 2000 and the payment of the purchase price of
transmission assets in October 2000, we incurred an inter-company loan payable
to our parent company, Inversiones HQI Chile Holding Limitada. The total amount
owed was $538.6 million. The inter-company loan was payable in dollars and
accrued interest at a rate equal to LIBOR plus 3.5% per year. Interest on the
inter-company loan was computed on the basis of a 360-day year. We retired the
inter-company loan payable on April 17, 2001 out of the proceeds from the
issuance and sale of the notes and the Chilean bonds.
FORWARD CONTRACTS
In order to hedge our exposure to fluctuations in the U.S. dollar/Chilean
peso exchange rate, in December 2000, we entered into 11 non-deliverable forward
exchange contracts with Hydro-Quebec for an aggregate notional amount of $250.0
million. The reference currency for all these contracts was the UF. On April 12,
2001, we entered into a contract to sell forward UF8,658,720 for $230.0 million
on April 17, 2001. From the proceeds of the Chilean bond offering we delivered
the required amount to settle this contract. In addition, on April 17, 2001, our
non-deliverable forward exchange contracts were terminated.
INTER-COMPANY LOAN RECEIVABLE FROM INVERSIONES HQI CHILE HOLDING LIMITADA
On April 17, 2001, we loaned $169.4 million (at an interest rate of
7-7/8%) to Inversiones HQI Chile Holding Limitada. The aggregate principal
amount of this loan is payable to us upon demand and periodic payments of
interest will be made out of dividends, when and if declared, that we pay to
Inversiones HQI Chile Holding Limitada. As of December 31, 2001, the balance
of the loan, including accrued interest, was $114.9 million. See "Item 11. --
Quantitative and Qualitative Disclosures About Market Risk."
TECHNICAL ASSISTANCE AGREEMENT
As of January 1, 2001, HQI Transelec and Hydro-Quebec International Inc.
entered into a "Services Agreement" whereby Hydro-Quebec will provide, on an "as
requested" basis, advisory, technical and commercial services in the areas of
transmission, generation, distribution, engineering, procurement,
telecommunications, information technology, human resources, financial services,
corporate and legal services.
7.C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
34
ITEM 8. FINANCIAL INFORMATION
8.A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See "Item 18. -- Financial Statements."
LEGAL PROCEEDINGS
We are involved in routine litigation and other proceedings in the ordinary
course of our business. We do not believe that any proceedings pending against
us are likely to have a material adverse effect on our business or results of
operations.
DIVIDENDS
Our dividend policy is voted on every year at our annual shareholders'
meeting. Pursuant to the LEY SOBRE SOCIEDADES ANONIMAS NO. 18046 and the
REGLAMENTO DE SOCIEDADES ANONIMAS, which we refer to collectively as the Chilean
Corporations Law, we are required to distribute annually as cash dividends to
our shareholders at least 30.0% of the net profit in each fiscal year, on a
prorated basis of their shares, unless otherwise decided in the relevant
shareholders meeting by the unanimous vote of stockholders representing all
issued stock.
Pursuant to the Chilean Corporations Law, and provided there is no loss
accumulated, during the fiscal year our board may declare provisional dividends
against profits obtained during the same year.
Under our by-laws, the period for calculation of our balance and profit
distribution will be ended as of December 31 of each year, at which point an
assets and liabilities general balance will be performed. The balance shall
express the new value of the shares and the corporate equity in accordance with
the provisions of the law. The dividends will be exclusively paid to the account
of net profit of the period or of those withheld from the balances approved by
the shareholders' meeting. Should the company have accrued losses, the profits
obtained in the period will be first allotted to absorb such losses. Should
there be losses in the period, they will be absorbed with the withheld profits.
8.B. SIGNIFICANT CHANGES
"Item 5.D. -- Operating and Financial Review and Prospects -- Trend
information" is incorporated in this "Item 8.B. -- Financial Information --
Significant Changes" by reference.
ITEM 9. THE OFFER AND LISTING
9.A. OFFER AND LISTING DETAILS
Not applicable.
9.B. PLAN OF DISTRIBUTION
Not applicable.
9.C. MARKETS
There is no trading market for our common stock. Trading in our notes takes
place primarily on the Luxembourg Stock Exchange and in over-the-counter
markets.
35
9.D. SELLING SHAREHOLDERS
Not applicable.
9.E. DILUTION
Not applicable.
9.F. EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
10.A. SHARE CAPITAL
Not applicable.
10.B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Set forth below is a brief summary of certain significant provisions of our
by-laws and Chilean corporate law. This description does not purport to be
complete and is qualified by reference to our by-laws (an English translation of
which has been filed with the Commission) and to the Chilean corporate law.
OBJECTS AND PURPOSES
We are a privately held corporation with principal place of business and
jurisdiction in the Republic of Chile, governed mainly by Chilean laws
(including the Chilean Corporations Law) and our by-laws.
Article four of our by-laws states that our main business purpose is to
operate and develop our own or third parties' electric systems, intended for the
transportation or transmission of electric power, being able to that effect to
acquire and make use of the respective concessions and authorizations and
exercise all the rights and faculties conferred by the current legislation to
electric companies. Our business purpose also includes the commercialization of
the capacity of transportation lines and modification of substations and the
equipment related to them, so that the generating plants, both domestic and
foreign, may transmit the electric power they produce and reach their
consumption centers; the rendering of consulting services in the field of
engineering and company management related to its main purpose; and the
development of other commercial and industrial activities related to the use of
the electric transmission infrastructure.
APPROVAL OF A TRANSACTION WHEN A DIRECTOR IS INTERESTED
Article sixteen of our by-laws states that directors may only enter into
contracts with us in which one or more directors have their own interests or as
representatives of another person, when such interests are known or approved by
the board and conform to equity conditions similar to those that normally
prevail in the market. Notwithstanding the above, directors who have personal
interests or as representatives of other persons in regards to a transaction
shall inform the board of directors of this situation or they shall abstain from
deliberating on said transaction. A decision regarding approval of the
transaction will be reached without the director or directors involved, and
should the number of eligible directors not form a quorum, said decision will be
determined at a meeting of the shareholders.
36
<Page>
EQUITY AND SHARES
VOTING RIGHTS
Each shareholder is entitled to one vote per each share he possesses or
represents. The shareholders may be represented in the meetings by another
person, whether a shareholder or not. The power shall be in writing in the form
and conditions stipulated by law and the regulations.
SHAREHOLDERS' MEETINGS
The shareholders will meet in regular and special shareholders' meetings.
The regular meetings are held once a year in the first four-month period
following the end of our fiscal year, to decide those matters normally dealt
with in those meetings. The following are matters to be approved at a regular
meeting:
o the analysis of the company's status and of the management
supervisors' reports and the approval or objection of the annual
report, balance, statements and financial presentations provided by
the board or the company's liquidators;
o the profit distribution for each period and, particularly, the
distribution of dividends;
o the election or revocation of the board members, liquidators and the
management supervisors;
o the setting forth of board remuneration; and
o any other affair related to the company's interests and performance,
except for those to be dealt with in a special shareholders' meeting,
pursuant to law and to the company's by-laws.
The following are matters of a special meeting:
o the company's dissolution;
o the company's modification, merger or division and the modification of
its by-laws;
o the issuance of bonds or debentures, convertible into shares;
o the alienation of the company's assets and liabilities or of the total
of its assets;
o the awarding of real and personal guarantees to secure third parties'
obligations, unless they are affiliate companies, in which case the
board's approval will be sufficient; and
o any other matters that pursuant to law or our by-laws are to be dealt
with in a special shareholders' meeting.
NOTICES
Notice of shareholders' meetings, both regular and special, must be given
through a highlighted advertisement to be published at least on three different
days in the newspaper of the corporate domicile and in the form and conditions
established by Chilean law. Nevertheless, those meetings attended by the
totality of voting shares may be held on a valid basis, even if the formalities
required for notice have not been met. The notices for a second call may be
published once the first call to
37
meet has failed and, at all events, the new meeting shall be called to be held
within forty-five days following the date for the meeting which was not held.
QUORUM AND VOTING REQUIREMENTS
The meetings both regular or special will be constituted in first call with
shares representing at least the absolute majority of the voting shares, and, in
second call with those attending or represented, regardless of number, and the
agreements will be adopted by the absolute majority of the attending or
represented shares with the right to vote, without prejudice of the special
majorities provided by law and by the company's by-laws.
Only the holders whose shares have been registered in the shareholders
registry five business days before the respective meeting is held will be
entitled to participate in the meetings and exercise their voice and voting
rights.
CHANGE OF CONTROL
There are no provisions in our by-laws which may have the effect of
delaying, deferring or preventing a change of control of our company and that
would only operate with respect to a merger, acquisition or corporate
restructuring involving us.
DISSOLUTION AND LIQUIDATION
Upon dissolution, the company will be liquidated by a liquidating
commission comprised of three members elected by a shareholders' meeting, which
will determine the commission's faculties, obligations, remunerations and
period.
Our by-laws may only be amended by agreement of the shareholders in a
special shareholders' meeting. Agreements in shareholders meetings are reached
by a majority of the votes of the shareholders attending the meeting. However,
amendments to the by-laws relating to the following matters require the vote of
at least 2/3 of the issued voting shares:
o transformation, division or merger of our company;
o amendment of the term of existence of our company, if any;
o early dissolution of our company;
o change of our corporate domicile;
o decrease in our corporate capital;
o approval of contributions when consisting of assets rather than cash
and their assessment;
o modification of rights reserved to shareholders meetings or
modification to the limitations of the board's authority;
o decrease in the number of board members;
o disposal of 50% or more of our assets, whether including liabilities
or not, or the proposal or modification to any business plan that
contemplates the disposal of more that 50% of our assets;
38
o modification of the manner our corporate benefits are distributed;
o grant of guarantees to secure third parties' obligations that exceed
50% of our corporate assets, except in case of related companies,
where only the board's approval is required;
o the acquisition of shares issued by our company; and
o the correction of formal mistakes in our by-laws related to the issues
above that may affect the validity of our company.
10.C. MATERIAL CONTRACTS
"Item 4.A. -- Information on the Company -- History and development of
the company" and "Item 11. -- Quantitative and Qualitative Disclosures About
Market Risk" are incorporated in this "Item 10.C. -- Additional Information --
Material contracts" by reference.
10.D. EXCHANGE CONTROLS
The Central Bank, among other things, is responsible for monetary policies
and for exchange controls in Chile. Chilean issuers have been authorized to
offer bonds internationally by Chapter XIV, as amended, of Title I of the
Compendium of Foreign Exchange Regulations, or the Compendium, issued by the
Central Bank. The Compendium was amended on April 19, 2001 (the "New
Compendium"). Effective March 1, 2002, the Central Bank introduced amendments to
the New Compendium that further simplify foreign exchange operations. Prior to
the New Compendium, any international issue of bonds had to be approved by the
Central Bank after the submission of an application to the Central Bank through
a bank or other participant in the Formal Exchange Market. Absent the Central
Bank's authorization, issuers could not offer bonds outside of Chile. In
connection with a bond issuance, both the issuer and the issue had to be
registered with the Superintendent of Securities and Insurance, or the SVS
(SUPERINTENDENCIA DE VALORES Y SEGUROS). The bonds were required to have an
average weighted term of not less than two years, weighted on the basis of
principal installments and on the assumption that if the issuer has the option
to call the bonds, such bonds were deemed to have been called at the earliest
possible date for purposes of this requirement. The bonds were required to be
issued by a company whose unsecured external debt obligations had been rated at
least BB, for its issues with an average weighted term of not less than two
years and not over four years, at least BB-, for its issues with an average
weighted term of not less than four years, by an internationally recognized
statistical rating organization. The notes were approved by the Central Bank on
April 10, 2001 in accordance with these regulations.
The following is a summary of the currently relevant portions of the
Central Bank's regulations regarding an issue of bonds to the international
markets denominated in a currency other than Chilean pesos. This summary does
not purport to be complete and is qualified in its entirety by reference to the
provisions of Chapter XIV of the New Compendium that pertain to the
international issuance of bonds.
Under the New Compendium, Chilean issuers may freely offer bonds
internationally, without the prior approval of the Central Bank and without any
of the specific requirements contained in the previous rules (i.e. no
registration with the SVS, ratings or minimum weighted average term are needed).
The prior rules required that the foreign currency proceeds from the
international sale of bonds be either brought into Chile or held outside of
Chile and used to finance investments outside of Chile or
39
to repay obligations of foreign branches and/or subsidiaries. The proceeds from
the initial sale of our notes were brought into Chile in compliance with these
regulations. The New Compendium does not restrict the use of funds, which may
either be brought into Chile or held outside the country.
Remittance of U.S. dollars in connection with the notes must be done
through the Formal Exchange Market. The New Compendium allows for payments to
be made directly abroad. Under the New Compendium no prior consents are
required for all payments in respect of the notes, including in the event of
the voluntary redemption of the notes by us. However, the Central Bank must be
notified of all payments, including any voluntary redemption, after such
payments are made. On May 4, 2001 the Central Bank approved our application to
have the notes subject to the New Compendium.
The authorizations granted with respect to the notes are unilateral acts of
the Central Bank. Although authorizations of the Central Bank have not been
rescinded historically, in connection with the renegotiation of Chile's external
debt in 1980s, the Central Bank requested lenders to renegotiate the terms of
their loans to Chilean borrowers. We cannot assure you that certain Chilean
restrictions applicable to the holders of the notes will be imposed in the
future, nor can we assess the duration or impact of such restrictions, if
imposed.
10.E. TAXATION
The following discussion summarizes certain material Chilean tax and United
States federal income tax consequences of the purchase, ownership and
disposition of our notes. The summary does not purport to be a comprehensive
description of all potential Chilean tax and U.S. federal income tax
consideration that may be relevant to a decision to own or dispose of the notes
and is not intended as tax advice to any particular investor. This summary does
not describe any tax consequences arising under the laws of any state, locality
or other taxing jurisdiction other than Chile and the United States. There is
currently no income tax treaty between the United States and Chile.
CHILEAN TAXATION
The following is a general summary of the principal consequences under
Chilean tax law with respect to an investment in notes made by a Foreign Holder.
It is based on the tax laws of Chile as in effect on the date of this annual
report, as well as regulations, rulings and decisions of Chile available on or
before such date and now in effect. All of the foregoing are subject to change,
possibly with retroactive effect. Under Chilean law, provisions contained in
statutes such as tax rates applicable to foreign investors, the computation of
taxable income for Chilean purposes and the manner in which Chilean taxes are
imposed and collected may be amended only by another law. In addition, the
Chilean tax authorities enact rulings and regulations of either general or
specific application and interprets the provisions of Chilean tax law. Chilean
tax law may not be assessed retroactively against taxpayers who act in good
faith relying on such rulings, regulations and interpretations, but Chilean tax
authorities may change their rulings, regulations find interpretations
prospectively. For purposes of this summary, the term "Foreign Holder" means
either: (i) in the case of an individual, a person who is not resident in Chile
(for purposes of Chilean taxation, an individual holder is resident in Chile if
he has resided in Chile for more than six months in one calendar year, or a
total of more than six months in two consecutive fiscal years); or (ii) in the
case of a legal entity, a legal entity that is not organized under the laws of
Chile, unless the notes are assigned to a branch or a permanent establishment of
such entity in Chile.
Under Chile's Income Tax Law, payment of interest or premiums, if any, made
in respect of the notes will be subject to a 4.0% Chilean withholding tax.
The Chilean Income Tax Law provides that a Foreign Holder is subject to
income tax on his Chilean source income. For this purpose, Chilean source income
means earnings from activities
40
performed in Chile or from the sale, disposition or other transactions in
connection with assets or goods located in Chile. Therefore, any capital gains
realized on the sale or other disposition by a Foreign Holder of the notes
generally will not be subject to any Chilean taxes, provided that such sales or
other dispositions occur outside of Chile.
A Foreign Holder will not be liable for estate, gift, inheritance or
similar taxes with respect to its holdings unless notes held by a Foreign Holder
are either located in Chile at the time of such Foreign Holder's death, or, if
the notes are not located in Chile at the time of a Foreign Holder's death, if
such notes were purchased or acquired with monies obtained from Chilean sources.
A Foreign Holder will not be liable for Chilean stamp, registration or similar
taxes.
UNITED STATES TAXATION
The following discussion summarizes certain material U.S. federal income
tax consequences to beneficial owners arising from the purchase, ownership and
disposition of our notes. The discussion which follows is based on the United
States Internal Revenue Code of 1986, as amended (the "Code"), its legislative
history, judicial authority, administrative rulings and practice and Treasury
regulations promulgated thereunder, all as in effect and current on the date
hereof. Such authorities may be repealed, revoked or modified so as to result in
U.S. federal income tax consequences different from those discussed below,
possibly with retroactive effect.
For purposes of this summary, the term "U.S. Holder" means a beneficial
owner of a note that is, for U.S. federal income tax purposes (a) an individual
who is a United States citizen or resident, (b) a corporation or other entity
taxable as such created or organized under the laws of the U.S. or any political
subdivision thereof, (c) an estate that is subject to U.S. federal income tax on
a net basis with respect to its worldwide income or (d) a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust, and one or more United States persons have the
authority to control all substantial decisions of the trust. The term "Non-U.S.
Holder" means a beneficial owner of a note that is not a U.S. Holder. If a
partnership holds notes, the tax treatment of a partner will depend upon the
status of the partner and the activities of the partnership. Partners of
partnerships holding notes should consult their tax advisors.
This discussion is intended as a summary only and is not intended as tax
advice to any particular investor. This summary is not a complete analysis or
listing of all potential U.S. federal income tax consequences to U.S. Holders
and Non-U.S. Holders relating to the notes, and does not address the effect of
any United States gift, estate, state or local tax law or foreign tax law on a
potential investor in the notes. This summary does not address the tax treatment
of U.S. Holders and Non-U.S. Holders that may be subject to special income tax
rules, including, without limitation, insurance companies, tax-exempt
organizations, banks, U.S. Holders subject to the alternative minimum tax, U.S.
Holders and Non-U.S. Holders that are broker-dealers in securities, U.S. Holders
and Non-U.S. Holders that hold the notes as a hedge against currency risks, as a
position in a "straddle" for tax purposes, or as part of an "integrated
transaction" within the meaning of Section 1.1275-6 of the U.S. Treasury
Regulations. This summary is generally limited to investors who will hold the
notes as "capital assets" within the meaning of Section 1221 of the Code, whose
functional currency is the U.S. dollar and who are initial investors who
purchase the notes at the issue price within the meaning of Section 1273 of the
Code.
U.S. HOLDERS
TAXATION OF STATED INTEREST. Stated interest paid on a note will be
included in the income of a U.S. Holder as ordinary income at the time it is
treated as received or accrued, in accordance with the U.S. Holders regular
method of tax accounting.
41
U.S. FOREIGN TAX CREDIT RULES. Stated interest received or accrued on the
notes will constitute income from sources without the United States. If Chilean
withholding taxes are imposed, U.S. Holders will be treated as having actually
received an amount equal to the amount of such taxes and as having paid such
amount to the relevant taxing authority. As a result, the amount of interest
income included in gross income by a U.S. Holder will be greater than the amount
of cash actually received by the U.S. Holder. A U.S. Holder may be able, subject
to certain generally applicable limitations, to claim a foreign tax credit or a
deduction for Chilean withholding taxes imposed on payments of stated interest.
Stated interest income generally will constitute "passive income" or, in the
case of certain U.S. Holders, "financial services income" for U.S. foreign tax
credit purposes (or "high withholding tax interest" if the Chilean withholding
tax is ever imposed at a rate of 5% or more). The calculation of U.S. foreign
tax credits and, in the case of a U.S. Holder that elects to deduct foreign
taxes, the availability of deductions involves the application of complex rules
that depend on a U.S. Holder's particular circumstances. U.S. Holders should,
therefore, consult their own tax advisors regarding the application of the U.S.
foreign tax credit rules to interest income on the notes.
PURCHASE, SALE, REDEMPTION, RETIREMENT AND OTHER DISPOSITION OF THE NOTES.
In general, a U.S. Holder will generally recognize gain or loss on the sale,
redemption, retirement or other disposition of a note in an amount equal to the
difference between (i) the amount of cash and the fair market value of property
received by such U.S. Holder on such disposition (less any amounts attributable
to accrued but unpaid interest which will be taxable as such) and (ii) the U.S.
Holder's adjusted tax basis in the note (as described above). A U.S. Holder's
adjusted tax basis in a note will equal the acquisition cost of such note to the
U.S. Holder decreased by the amount of any principal payments made on the note.
Such gain or loss will be capital gain or loss. Net capital gains derived with
respect to capital assets held for more than one year are eligible for reduced
rates of taxation for non-corporate U.S. Holders (including individuals).
Certain limitations exist on the deductibility of capital losses.
Such gain or loss recognized will generally be U.S.-source gain or loss.
Prospective investors should consult their own tax advisors as to the foreign
tax credit implications of such sale, redemption, retirement or other
disposition of a note.
NON-U.S. HOLDERS
Except as otherwise described below, a Non-U.S. Holder of a note will not
be subject to U.S. federal income tax by withholding or otherwise on payments of
interest on a note or gain realized in connection with the sale, redemption,
retirement or other disposition of a note, unless the Non-U.S. Holder is (a) in
the case of gain realized by a Non-U.S. Holder who is an individual, such holder
is present in the United States for 183 days or more in the taxable year of
disposition and certain other conditions are satisfied; or (b) engaged in a
trade or business in the United States and the interest or gain on the note, as
the case may be, is effectively connected with the conduct of such trade or
business. In addition, if such Non-U.S. Holder is a foreign corporation, it may
be subject to a branch profits tax equal to 30.0% (or such lower rate provided
by an applicable treaty) of its effectively connected earnings and profits for
the taxable year, subject to certain adjustments.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding and information reporting will likely not apply to
payments made by us or our paying agents, in their capacities as such, to a
Non-U.S. Holder of a note if the holder has provided the required certification
that it is not a "United States person" within the meaning of the Code, provided
that neither we nor our paying agent has actual knowledge that the holder is a
United States person. Payments of the proceeds from a disposition by a Non-U.S.
Holder of a note made to or through a foreign office of a broker will likely not
be subject to information reporting or backup
42
withholding, except that information reporting and backup withholding may apply
to those payments if the broker is:
o a United States person;
o a controlled foreign corporation for U.S. federal income tax purposes;
o a foreign person 50% or more of whose gross income is effectively
connected with a United States trade or business for a specified
three-year period; or
o a foreign partnership, if at any time during its tax year, one or more
of its partners are United States persons, as defined in Treasury
regulations, who in the aggregate hold more than 50% of the income or
capital interest in the partnership or if, at any time during its tax
year, the foreign partnership is engaged in a United States trade or
business.
Payment of the proceeds from a disposition by a Non-U.S. Holder of a note
made to or through the United States office of a broker is likely subject to
information reporting and backup withholding unless the holder or beneficial
owner certifies as to its taxpayer identification number or otherwise
establishes an exemption from information reporting and backup withholding.
Non-U.S. Holders should consult their own tax advisors regarding
application of backup withholding in their particular circumstance and the
availability of and procedure for obtaining an exemption from backup withholding
under current Treasury regulations. Any amounts withheld under the backup
withholding rules from a payment to a Non-U.S. Holder will be allowed as a
refund or a credit against the holder's U.S. federal income tax liability,
provided the required information is furnished to the Internal Revenue Service.
10.F. DIVIDENDS AND PAYING AGENTS
Not applicable.
10.G. STATEMENT BY EXPERTS
Not applicable.
10.H. DOCUMENTS ON DISPLAY
We are subject to the information requirements of the Securities Exchange
Act of 1934, as amended, pursuant to which we file reports and other information
with the United States Securities and Exchange Commission. Copies of our
by-laws, this annual report and reports and other information filed by us with
the Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1023, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at 233 Broadway, New York,
New York 10279 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, IL 60661-2511. You may obtain copies of this material by mail
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
10.I. SUBSIDIARY INFORMATION
Not applicable.
43
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and currency
exchange rates. From time to time we assess our exposure and monitor
opportunities to manage these risks, including entering into derivative
contracts.
In the normal course of business we also face risks that are either
non-financial or non-quantifiable. Such risks include country risk, credit risk
and legal risk and are not represented in the tables below.
INTEREST RATE RISK
Interest rate risk exists principally with respect to our indebtedness that
bears interest at fixed rates. At December 31, 2001 we had outstanding
indebtedness totaling Ch$454,094 million, excluding interest. This indebtedness
consists of Chilean bonds totaling UF9.2 million, or Ch$149,616 million, that
bear interest at 6.2% and US dollar-denominated notes totaling US$465.0 million,
or Ch$304,477 million, that bear interest at 7-7/8%.
Neither the Chilean bonds nor the US dollar-denominated notes have
maturities of principal in the next five years. The fair values of the Chilean
bonds and the US dollar-denominated notes were Ch$146,210 million and Ch$314,428
million, respectively, at December 31, 2001.
We partially compensate for our interest rate risk through a fixed rate
loan to Inversiones HQI Chile Holding Limitada totaling US$111.2 million
(formerly $169.4 million), excluding accrued interest, or Ch$72,819 million,
that bears interest at 7-7/8%. On July 31, 2001, Inversiones HQI Chile Holding
Limitada repaid $58.1 million of the principal amount of this loan and $3.9
million in accrued interest. To the extent future amounts of this loan are
repaid or we use the proceeds from the loan to fund either our ongoing
operations or our future capital expenditures, we will consider entering into
hedging arrangements to mitigate our interest rate and currency exchange risks.
We also have short-term US dollar time deposits totaling US$125.0 million,
or Ch$81,863 million, that earn interest at the market prevailing rate at the
time of the contract and, accordingly, are carried at fair value.
The following table summarizes our interest earning assets and debt
obligations that are sensitive to changes in interest rates at December 31,
2001.
ESTIMATED FAIR
EXPECTED MATURITY VALUE MARKET VALUE
----------------------- --------------
(IN MILLIONS OF CONSTANT CH$ OF
DECEMBER 31, 2001, EXCEPT FOR %)
INTEREST EARNING ASSETS
Time deposits
U.S. dollar-denominated............................... Ch$81,863 Ch$81,863
Weighted average interest rate..................... 2.1% --
INTEREST BEARING LIABILITIES
Long-term bonds payable
Fixed-rate Chilean bonds........................... 149,616 146,210
Weighted average interest rate..................... 6.2% --
Fixed-rate US dollar notes......................... 304,477 314,428
Weighted average interest rate 7.875% --
44
We continue to have interest rate exposure with respect to the notes that
pay interest at fixed rates and the Chilean bonds that pay interest based on
changes in inflation in Chile and at a fixed rate. This exposure is partially
offset by the loan to our parent discussed above that pays interest at a fixed
rate equivalent to the fixed interest rate on the notes.
FOREIGN CURRENCY RISK
Our principal exchange rate risk involves changes in the value of the
Chilean peso to the U.S. dollar. We have US dollar-denominated notes totaling
$465.0 million or Ch$304,477 million. Mitigating this exposure, we have the loan
issued to Inversiones HQI Chile Holding Limitada described above for $111.2
million (excluding accrued interest), short-term investments in the financial
market for $125.0 million, swap contracts for $170.0 million and forward
exchange contracts for $36.0 million. Under the swap contracts, the company will
pay principal of UF7.3 million and a weighted average interest rate of 9.2% plus
price-level restatement and receive $170.0 million and interest at 7.875%. These
contracts terminate in 2006 and the payment/receive dates are consistent with
the company's US dollar-denominated notes. The forward contracts have a nominal
value of $36.0 million and expire in the first half of 2002. The fair value of
the company's forwards and swaps at December 31, 2001 represent a liability of
Ch$12,859 million.
The balance sheet exposure to the exchange rate fluctuation is mitigated by
the fact that our transmission toll income is associated with the US dollar.
Toll contracts are denominated in US dollars, however monthly billing is
expressed at their equivalent in Chilean pesos, at the average monthly observed
US dollar exchange rate for about 85% of contracts, and at the current US dollar
exchange rate on the last day of the month for the rest of the contracts.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
We did not default on any of our debt obligations or fail to pay any
declared dividends in 2001.
ITEM 14. MATERIAL MODIFICATION TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. [RESERVED]
ITEM 16. [RESERVED]
45
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of this item.
ITEM 18. FINANCIAL STATEMENTS
Pages F-1 to F-53 of this annual report are incorporated into this "Item
18. -- Financial Statements" by reference.
ITEM 19. EXHIBITS
EXHIBIT NO.
1* By-laws of HQI Transelec Chile S.A.: TRANSFORMACION INVERSIONES
HQI TRANSELEC LIMITADA HOY HQI TRANSELEC CHILE S.A.
(Transformacion Inversiones HQI Transelec Limitada How HQI
Transelec Limitade, today HQI Transelec Chile S.A.).
2.1* CONTRATO DE EMISION DE BONOS HQI TRANSELEC CHILE S.A. Y BANCO DE
CHILE (Indenture Agreement HQI Transelec Chile S.A. and Banco de
Chile), dated February 12, 2001.
2.2* MODIFICACION CONTRATO DE EMISION DE BONOS (Amendment to the
Indenture Agreement), dated March 18, 2001.
2.3* Form of Outstanding Notes for the Company's 7-7/8% Senior Notes
due 2011.
4.1* CONTRATO DE PEAJE BASICO ENTRE EMPRESA NACIONAL DE ELECTRICIDAD
S.A. Y COMPANIA NACIONAL DE TRANSMISION ELECTRICA S.A. (Basic
Toll Agreement between Empresa Nacional de Electricidad S.A. and
Compania Nacional de Transmision Electrica S.A.), dated October
23, 2000.
4.2* CONTRATO DE PEAJE BASICO ENTRE EMPRESA ELECTRICA PANGUE S.A. Y
COMPANIA NACIONAL DE TRANSMISION ELECTRICA S.A. (Basic Toll
Agreement between Empresa Electrica Pangue S.A. and Compania
Nacional de Transmision Electrica S.A.), dated October 23, 2000.
4.3* CONTRATO DE PEAJE BASICO ENTRE EMPRESA ELECTRICA PEHUENCHE S.A.
Y COMPANIA NACIONAL DE TRANSMISION ELECTRICA S.A. (Basic Toll
Agreement between Empresa Electrica Pehuenche S.A. and Compania
Nacional de Transmision Electrica S.A.), dated October 23, 2000.
4.4* CONTRATO DE PEAJE ADICIONAL ENTRE EMPRESA NACIONAL DE
ELECTRICIDAD S.A. Y COMPANIA NACIONAL DE TRANSMISION ELECTRICA
S.A. (Additional Toll Agreement between Empresa Nacional de
Electricidad S.A. and Compania Nacional de Transmision Electrica
S.A.), dated October 23, 2000.
4.5* CONTRATO DE PEAJE ADCIONAL ENTRE EMPRESA ELECTRICA PEHUENCHE
S.A. Y COMPANIA NACIONAL DE TRANSMISION ELECTRICA S.A.
(Additional Toll Agreement between Empresa Electrica Pehuenche
S.A. and Compania de Transmision Electrica S.A.), dated October
23, 2000.
46
4.6* CONTRATO DE PEAJE BASICO POR LINEAS DE INYECCION ENTRE EMPRESA
NACIONAL DE ELECTRICIDAD S.A. Y COMPANIA NACIONAL DE TRANSMISION
ELECTRICA S.A. (Basic Toll Agreement for the Injection Lines
between Empresa Nacional de Electricidad S.A. and Compania
Nacional de Transmision Electrica S.A.), dated October 23, 2000.
4.7* CONVENIO SOBRE INVERSIONES FUTURAS ENTRE EMPRESA NACIONAL DE
ELECTRICIDAD S.A. Y COMPANIA NACIONAL DE TRANSMISION ELECTRICA
S.A. (Future Investments Agreement between Empresa Nacional de
Electricidad S.A. and Compania Nacional de Transmision Electrica
S.A.), dated October 23, 2000.
* Incorporated by reference to HQI Transelec Chile S.A.'s Offer to Exchange
on Form F-4, dated July 26, 2001.
47
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
HQI Transelec Chile S.A.
/s/ Real Paul-Hus
-------------------------------
Real Paul-Hus
Finance Manager and Treasurer
Date: June 28, 2002
48
INDEX TO FINANCIAL STATEMENTS
HQI TRANSELEC CHILE S.A.
FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 2001
CONTENTS
Reports of independent accountants..........................................F-2
Balance sheets..............................................................F-6
Statements of income........................................................F-8
Statements of cash flows....................................................F-9
Notes to the financial statements..........................................F-11
Ch$ - Chilean pesos
ThCh$ - Thousands of Chilean pesos
UF - Unidad de Fomento is an inflation-indexed, peso-denominated
monetary unit. The UF is set daily in advance based on the
previous month's inflation rate.
US$ - U.S. dollars
ThUS$ - Thousands of U.S. dollars
F-1
[PricewaterhouseCoopers letterhead]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors,
HQI Transelec Chile S.A.
We have audited the accompanying consolidated balance sheet of HQI
Transelec Chile S.A. and subsidiary as of December 31, 2000 and the related
consolidated statements of income and of cash flows for the period from October
23, 2000 to December 31, 2000 and the balance sheet of HQI Transelec Chile S.A.
as of December 31, 2001 and the related statements of income and of cash flows
for the year then ended, all expressed in constant Chilean pesos of December 31,
2001. These financial statements are the responsibility of the HQI Transelec
Chile S.A.'s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Chile and the United States of America. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also involves assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of HQI Transelec
Chile S.A. and subsidiary at December 31, 2000 and the financial position of HQI
Transelec Chile S.A. at December 31, 2001 and the results of operations and cash
flows for the period from October 23, 2000 to December 31, 2000 and for the year
ended December 31, 2001, in accordance with accounting principles generally
accepted in Chile.
Accounting principles generally accepted in Chile vary in certain important
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have affected the determination of
net income and consolidated net income expressed in constant Chilean pesos of
December 31, 2001 for the periods from October 23, 2000 to December 31, 2000 and
from January 1, 2001 to December 31, 2001, respectively, and the
determination of shareholders' equity and consolidated shareholders' equity as
of December 31, 2000 and December 31, 2001, respectively, to the extent
summarized in Note 25 to the financial statements.
Santiago, Chile /s/ PricewaterhouseCoopers
May 17, 2002
F-2
[PricewaterhouseCoopers letterhead]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors,
HQI Transelec Chile S.A.
We have audited the accompanying combined statements of income and of cash
flows for the Transmission Business (as defined in Note 1 to the financial
statements), acquired by HQI Transelec Chile S.A. from Empresa Nacional de
Electricidad S.A., for the period from January 1, 2000 to October 22, 2000, all
expressed in constant Chilean pesos of December 31, 2001. These financial
statements are the responsibility of the HQI Transelec Chile S.A.'s management.
Our responsibility is to express an opinion on these financial statements based
on our audit. We did not audit the carved-out financial statements of the
Injected assets (as defined in Note 1 to the financial statements) for the
period from January 1, 2000 to October 22, 2000, which statements reflect total
revenues constituting 18% of the related combined total revenues for that
period. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for the Injected assets, is based solely on the report of other auditors.
We conducted our audit in accordance with auditing standards generally
accepted in Chile and the United States of America. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also involves assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audit and the report of other auditors, the
combined financial statements referred to above present fairly, in all material
respects, the results of operations and of cash flows of the Transmission
Business for the period from January 1, 2000 to October 22, 2000, in accordance
with accounting principles generally accepted in Chile.
Accounting principles generally accepted in Chile vary in certain important
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have affected the determination of
combined net income expressed in constant Chilean pesos of December 31, 2001 for
the period from January 1, 2000 to October 22, 2000 to the extent summarized in
Note 25 to the financial statements.
Santiago, Chile /s/ PricewaterhouseCoopers
March 13, 2001
F-3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
HQI Transelec Chile S.A.
We have audited the accompanying combined statements of income and cash flows of
the Transmission Business (as defined in Note 1 to the combined financial
statements) for the year ended December 31, 1999, all expressed in constant
Chilean pesos as of December 31, 2001. These financial statements are the
responsibility of HQI Transelec Chile S.A.'s management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in Chile and in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined results of its operations and its cash flows
of the Transmission Business for the year ended December 31, 1999, in conformity
with accounting principles generally accepted in Chile.
Accounting principles generally accepted in Chile vary in significant
respects from accounting principles generally accepted in the United States
of America. The application of the latter would have affected the
determination of the net income for the year ended December 31, 1999 and the
determination of shareholders' equity as of December 31, 1999, also expressed
in constant Chilean pesos as of December 31, 2001, to the extent summarized
in Note 25 to the combined financial statements.
Santiago, Chile /s/ Deloitte & Touche
---------------------
March 13, 2001, except for the updating to Deloitte & Touche
December 31, 2001 currency, for which the
date is May 17, 2002
F-4
[Deloitte & Touche letterhead] [Deloitte & Touche Logo]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
HQI Transelec Chile S.A.
We have audited the accompanying statement of net liabilities of the Injected
Assets of Empresa Nacional de Electricidad S.A. and subsidiaries ("Endesa")
as of October 22, 2000, and the related statements of operations and cash
flows for the period from January 1, 2000 to October 22, 2000, all expressed
in constant Chilean pesos as of December 31, 2001. These financial statements
are the responsibility of the HQI Transelec Chile S.A.'s management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Chile and in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in
all material respects, the financial position of the Injected Assets of
Endesa as of October 22, 2000, and the results of its operations and its
cash flows for the period from January 1, 2000 to October 22, 2000, in
conformity with accounting principles generally accepted in Chile.
Accounting principles generally accepted in Chile vary in certain significant
respects from accounting principles generally accepted in the United States
of America. The application of the latter would have affected the
determination of net loss for the period from January 1, 2000 to
October 22, 2000 and the determination of shareholders' equity as of
October 22, 2000, also expressed in constant Chilean pesos as of
December 31, 2001, to the extent summarized in Note 25 to the financial
statements.
Santiago, Chile /s/ Deloitte & Touche
---------------------
March 13, 2001, except for the updating Deloitte & Touche
to December 31, 2001 currency
F-5
HQI TRANSELEC CHILE S.A.
BALANCE SHEETS
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
AT DECEMBER 31,
---------------------------------
2000 2001
-------------- -----------
(CONSOLIDATED)
ThCh$ ThCh$
ASSETS
CURRENT ASSETS
Cash 90,562 119,762
Time deposits (Note 6) 19,045,122 81,862,818
Marketable securities (Note 7) 2,019,472 2,960,188
Trade accounts receivable (Note 8) 8,123,383 8,934,578
Notes and accounts receivable from
related companies (Note 20) - 2,389,387
Recoverable taxes (Note 17) 105,197 1,479,870
Deferred income taxes (Note 17) 404,296 179,909
Other current assets (Note 9) 3,321,314 7,089,614
----------- -----------
Total current assets 33,109,346 105,016,126
----------- -----------
PROPERTY, PLANT AND EQUIPMENT (Note 10)
Land 5,383,262 5,385,795
Buildings and infrastructure 270,351,007 281,185,354
Machinery and equipment 222,654,255 222,328,823
Technical revaluation 20,283,237 19,528,482
Other fixed assets 1,942,952 1,824,294
----------- -----------
Subtotal 520,614,713 530,252,748
Accumulated depreciation (44,001,902) (57,579,571)
----------- -----------
Total property, plant and equipment, net 476,612,811 472,673,177
----------- -----------
OTHER ASSETS
Goodwill, net of accumulated amortization of ThCh$ 1,209,826
and ThCh$ 6,646,494, respectively (Note 11) 123,229,414 98,929,380
Notes and accounts receivable from related
companies - long term (Note 20) - 72,819,412
Intangibles, net of accumulated amortization of ThCh$ 973,951
and ThCh$ 1,575,497, respectively 22,179,868 21,578,363
Deferred income taxes (Note 17) - 19,654,824
Other long-term assets (Note 9) 692,269 12,691,898
----------- -----------
Total other assets 146,101,551 225,673,877
----------- -----------
Total assets 655,823,708 803,363,180
=========== ===========
The accompanying notes form an integral part of these financial statements.
F-6
HQI TRANSELEC CHILE S.A.
BALANCE SHEETS
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
AT DECEMBER 31,
--------------------------------
2000 2001
-------------- -----------
(CONSOLIDATED)
ThCh$ ThCh$
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bonds payable - short term portion (Note 15) - 8,318,443
Trade accounts payable 2,862,157 3,930,087
Notes and accounts payable to related companies (Note 20) 321,911,503 270,159
Accrued liabilities (Note 14) 1,710,268 1,121,662
Other current liabilities (Note 16) 3,004,405 4,185,637
----------- -----------
Total current liabilities 329,488,333 17,825,988
----------- -----------
LONG-TERM LIABILITIES
Long-term bonds payable (Note 15) - 454,093,822
Accrued liabilities (Note 14) 1,230,145 13,565,705
Deferred income taxes (Note 17) 1,949,176 -
Other long-term liabilities 103,912 34,789
----------- -----------
Total long-term liabilities 3,283,233 467,694,316
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 19)
MINORITY INTEREST 20,056 -
SHAREHOLDERS' EQUITY (Note 18)
Common stock 319,754,826 319,754,826
Retained earnings - 3,277,260
Net income (loss) 3,277,260 (5,189,210)
----------- -----------
Total shareholders' equity 323,032,086 317,842,876
----------- -----------
Total liabilities and shareholders' equity 655,823,708 803,363,180
----------- -----------
----------- -----------
The accompanying notes form an integral part of these financial statements.
F-7
HQI TRANSELEC CHILE S.A.
STATEMENTS OF INCOME
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
TRANSMISSION BUSINESS
(COMBINED) HQI TRANSELEC
------------------------------- --------------------------------
FOR THE YEAR FOR THE YEAR
ENDED FOR THE PERIODS FROM ENDED
------------- -------------------------------- -------------
DEC. 31, 1999 JAN.1, 2000 TO OCT.23, 2000 TO DEC. 31, 2001
OCT. 22, 2000 DEC. 31, 2000
------------- -------------- --------------- -------------
(CONSOLIDATED)
ThCh$ ThCh$ ThCh$ ThCh$
OPERATING RESULTS
Net sales 84,511,069 68,586,889 17,508,602 89,958,980
Cost of sales (34,088,292) (26,701,659) (5,731,123) (24,114,695)
----------- ----------- ---------- -----------
Gross margin 50,422,777 41,885,230 11,777,479 65,844,285
----------- ----------- ---------- -----------
Selling and administrative expenses (1,868,935) (1,640,946) (240,227) (2,593,947)
----------- ----------- ---------- -----------
Operating income 48,553,842 40,244,284 11,537,252 63,250,338
NON-OPERATING RESULTS
Interest income 1,784,712 2,711,136 419,274 6,967,702
Non-operating income (Note 21) 2,528,878 2,567,258 25,927 272,219
Amortization of goodwill - - (1,209,826) (5,436,668)
Interest expense (21,455,607) (19,615,965) (5,712,852) (35,731,518)
Non-operating expenses (Note 22) (3,731,663) (685,234) (131,515) (871,408)
Price-level restatements (Note 5) (8,379,196) (6,449,038) (951,048) (32,894,546)
----------- ----------- ---------- -----------
Non-operating results (29,252,876) (21,471,843) (7,560,040) (67,694,219)
----------- ----------- ---------- -----------
Income before minority interest and income taxes 19,300,966 18,772,441 3,977,212 (4,443,881)
Minority interest - - (405) -
Income taxes (Note 17) (2,501,663) (2,775,220) (699,547) (745,329)
----------- ----------- ---------- -----------
NET INCOME (LOSS) 16,799,303 15,997,221 3,277,260 (5,189,210)
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
The accompanying notes form an integral part of these financial statements.
F-8
HQI TRANSELEC CHILE S.A.
STATEMENTS OF CASH FLOWS
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
TRANSMISSION BUSINESS
(COMBINED) HQI TRANSELEC
------------------------------- ----------------------------------
FOR THE YEAR FOR THE YEAR
ENDED FOR THE PERIODS FROM ENDED
------------- --------------------------------- -------------
DEC. 31, 1999 JAN. 1, 2000 TO OCT. 23, 2000 TO DEC. 31, 2001
OCT. 22, 2000 DEC. 31, 2000
------------- --------------- ---------------- -------------
(CONSOLIDATED)
ThCh$ ThCh$ ThCh$ ThCh$
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) 16,799,303 15,997,221 3,277,260 (5,189,210)
Charges (credits) to income that do not
represent cash movements:
Loss on sale of fixed assets - 122,996 - 41,975
Depreciation of property, plant and equipment 18,588,250 18,783,157 3,758,528 14,885,188
Impairment of property, plant and equipment 2,903,739 - - -
Obsolescence of inventory 692,107 - - -
Amortization of intangibles 289,752 297,546 116,224 667,730
Amortization of goodwill - - 1,209,826 5,436,668
Gain on sale of inventory (378,824) - - -
Provision for arbitration relating to transmission
tariffs and related settlement - (2,162,343) - -
Price-level restatements and exchange differences 8,379,196 6,449,038 951,048 32,894,546
Minority interest - - 405 -
Deferred income taxes - 1,789,182 (244,767) -
Other (186,775) (1,472,021) (68,233) (1,022,904)
(Increase) decrease in assets which affect cash flows:
Trade accounts receivable 7,161,873 (2,085,176) (5,407,350) (750,846)
Accounts receivable from related companies (3,050,210) (8,061,686) -
Recoverable taxes - 397,900 664,660
Inventories - - (43,537)
Other assets (828,954) 182,618 98,299 860,237
Increase (decrease) in liabilities which affect cash
flows:
Trade accounts payable 973,051 (980,692) 918,410 1,100,751
Accounts payable to related companies 2,425,016 4,263,832 - -
Accrued liabilities 950,913 (282,940) (304,896) -
Interest payable - - - 6,152,019
Income tax payable (net) - - - (1,892,515)
Value added tax and other taxes - - - 38,779
Other current liabilities 640,413 (2,011,787) (125,621) -
------------- ------------ ------------ ------------
Net cash provided by operating activities 55,358,850 31,226,845 4,843,793 53,178,881
------------- ------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES
Capital increase - - 31,912 -
Proceeds from issuance of bonds - - - 430,901,228
Proceeds from short-term financing 23,701,189 9,330,992 - -
Payment of loans - (35,556,590) - -
Dividends paid (25,937,845) (15,123,536) - -
Repayments of long-term borrowings and capital
lease obligation to related companies (20,727,022) (23,262,752) - (331,241,937)
Bond issuance and placement expenses - - - (9,860,346)
------------- ------------ ------------ ------------
Net cash (used in) provided by financing activities (22,963,678) (64,611,886) 31,912 89,798,945
------------- ------------ ------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from the sale of property, plant and
equipment 62,651 2,146,238 - 74,878
Investment in subsidiary - - (320,200,267) -
Collection of loans from related companies 108,574 34,314,616 4,619 39,208,951
Additions to long-term notes receivable from
related companies (28,745,572) - - (103,284,603)
Acquisitions of property, plant and equipment (3,447,034) (3,045,474) (1,298,518) (10,507,000)
Other (37,143) - - (2,708,521)
------------- ------------ ------------ ------------
Net cash (used in) provided by investing activities (32,058,524) 33,415,380 (321,494,166) (77,216,295)
------------- ------------ ------------ ------------
EFFECT OF INFLATION ON CASH AND CASH
EQUIVALENTS (149,291) (119,771) 719,262 72,422
------------- ------------ ------------ ------------
NET DECREASE (INCREASE) IN CASH AND
CASH EQUIVALENTS 187,357 (89,432) (315,899,199) 65,833,953
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE PERIOD 17,781 205,138 339,428,053 23,528,854
------------- ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT THE END
OF THE PERIOD 205,138 115,706 23,528,854 89,362,807
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
The accompanying notes form an integral part of these financial statements.
F-9
HQI TRANSELEC CHILE S.A.
STATEMENTS OF CASH FLOWS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
SUPPLEMENTARY CASH FLOWS INFORMATION
TRANSMISSION BUSINESS
(COMBINED) HQI TRANSELEC
------------------------------- ----------------------------------
FOR THE YEAR FOR THE YEAR
ENDED FOR THE PERIODS FROM ENDED
------------- --------------------------------- -------------
DEC. 31, 1999 JAN. 1, 2000 TO OCT. 23, 2000 TO DEC. 31, 2001
OCT. 22, 2000 DEC. 31, 2000
------------- --------------- ---------------- -------------
(CONSOLIDATED)
ThCh$ ThCh$ ThCh$ ThCh$
CASH PAID FOR:
Interest 19,194,982 13,039,530 4,425,735 17,335,608
Income taxes (net of refunds) 2,499,542 595,025 437,608 882,161
NON CASH INVESTING AND FINANCING ACTIVITIES
Notes payable incurred for acquisition of
Injected Assets 12,661,423 16,552,766 318,756,007 -
The accompanying notes form an integral part of these financial statements.
F-10
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
NOTE 1 - THE COMPANY
HQI Transelec Chile S.A., ("HQI Transelec") is a wholly-owned subsidiary of
Hydro-Quebec ("HQ") and was initially formed to acquire the Transmission
Business (as defined below) of Empresa Nacional de Electricidad S.A. ("Endesa").
HQI Transelec was incorporated on September 15, 2000 and had no significant
operations until its acquisition of the Transmission Business as described in
Note 2. The objective of HQI Transelec is to develop and operate electric power
transmission networks.
HQI Transelec is the largest electricity transmission company in Chile and
owns and operates the majority of the assets of the Sistema Interconectado
Central ("SIC"), the principal electricity transmission network in Chile. The
transmission network operates under an "open access" regime and is subject to
the Chilean electricity regulatory framework. HQI Transelec's revenues mainly
consist of tolls and transmission charges.
As described below, on October 23, 2000, HQI Transelec acquired 99.99% of
Compania Nacional de Transmision Electrica S.A. ("Transelec"). At the same time,
Transelec purchased from Endesa most of Endesa's remaining transmission assets
(the "Injected Assets"). Transelec and the Injected Assets together represent
the Transmission Business acquired from Endesa. See Note 3 b).
Per public deed dated January 18, 2001, HQI Transelec purchased from
Inversiones HQI Chile Holding Limitada ("Inversiones HQI Chile"), the parent
company of HQI Transelec, 96,806 shares of Transelec, corresponding to 0.01% of
the share capital, leaving it with 100% of shares of Transelec. This resulted in
the merger of the two companies with HQI Transelec absorbing the assets,
liabilities, rights and obligations of Transelec, which ceased to exist from
that date.
Transelec was formed in 1993 as a subsidiary of Endesa with the objective
of developing and operating facilities for the transmission of electricity. In
1993, Endesa leased to Transelec most of the transmission lines connected to the
SIC. This lease was terminated in May 1998, at which time Transelec acquired
certain transmission assets from Endesa. In June 1998, Transelec entered into a
capital lease with Endesa for additional transmission assets that Transelec
operated at that time (the "Capital Lease").
For the purpose of the notes that follow, references to the Company include
both HQI Transelec and the Transmission Business.
NOTE 2 - ACQUISITION OF TRANSMISSION BUSINESS
On October 23, 2000, HQI Transelec acquired the Transmission Business from
Endesa. The acquisition structure involved three simultaneous transactions and
two cash payments. The three transactions included a) acquisition of 100% of all
outstanding shares of Transelec (99.99% acquired by HQI Transelec and 0.01%
acquired by Inversiones HQI Chile, b) purchase by Transelec of the Injected
Assets, and c) extinguishment of the Capital Lease.
F-11
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
The two cash payments made at closing were a) US$537,300,000 by HQI
Transelec and Inversiones HQI Chile for 100% of the shares of Transelec and b)
US$538,646,000 by Inversiones HQI Chile on behalf of Transelec to extinguish
intercompany debt between Transelec and Endesa consisting of (i) US$213,157,000
related to the purchase of the Injected Assets (ii) US$279,070,000 related to
the Capital Lease and (iii) US$46,419,000 related to the remaining net
intercompany obligation of Transelec to Endesa.
Pursuant to the purchase-sale agreement for Transelec's shares signed by
HQI Transelec, Inversiones HQI Chile and HQ, as purchasers and Endesa and Endesa
Inversiones Generales S.A. ("Enigesa"), as sellers, the purchasers were required
to reimburse the sellers for the difference between the reference net equity
referred to in the purchase-sale agreement and the net equity at the close of
the transaction on October 23, 2000 if such difference was positive. The
purchasers and sellers could not agree on the audited net equity amount and
submitted the matter to arbitration in accordance with the purchase-sale
agreement. At December 31, 2000, the Company reflected the minimum additional
equity payment indicated by the closing audit of ThCh$ 701,251 (historical). On
June 29, 2001, a decision was rendered by the arbitrators. A net equity at
October 23, 2000 of ThCh$ 190,688,338 was determined, which was greater than the
initial reference net equity by ThCh$ 2,668,494. Since a portion of this amount
was previously recognized as goodwill at December 31, 2000, goodwill increased
by only ThCh$ 1,968,870 (historical) during 2001.
These cash and noncash transactions have been reflected in the accounts of
HQI Transelec as required by accounting principles generally accepted in Chile
("Chilean GAAP") as follows:
a) ACQUISITION OF TRANSELEC SHARES
ThCh$
-------------
Cash paid for 99.99% of Transelec's shares by HQI Transelec 320,200,267
Additional purchase price accrued and paid in cash in 2001 722,990
-------------
Total 320,923,257
Less: 99.99% of the net book value of Transelec 196,484,017
-------------
Original goodwill recorded by HQI Transelec 124,439,240
Difference in opening equity value paid in cash in 2001 1,998,404
-------------
Total goodwill 126,437,644
=============
b) ASSUMPTION OF INTERCOMPANY DEBT
ThCh$
-------------
Liability transferred to Transelec by Inversiones HQI Chile
for US$538,646,000 (see Note 20 b) 318,756,007
=============
F-12
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
c) VALUATION OF INJECTED ASSETS
Injected Assets were recorded at their acquisition cost by Transelec of
ThCh$ 126,957,720 as compared to their Endesa net book value of ThCh$
54,515,574.
As a consequence of acquisition of the Transmission Business by HQI
Transelec, the financial statements of the Transmission Business for periods
prior to October 23, 2000 are not fully comparable to the financial statements
of HQI Transelec. The more significant differences relate to the amortization of
goodwill, higher interest expense related to the intercompany debt at a
different interest rate, greater exposure to exchange rate fluctuations as all
intercompany debt is now dollar denominated and the increased depreciation
related to the HQI Transelec's higher basis in the Injected Assets.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) BASIS OF PREPARATION
The financial statements of HQI Transelec at December 31, 2001 have been
prepared in conformity with accounting principles generally accepted in Chile
issued by the Chilean Institute of Accountants, and specific instructions and
regulations issued by the Superintendent of Securities and Insurance Companies
("Chilean GAAP"). The latter predominate over the former in the event of
discrepancy.
The consolidated financial statements as of December 31, 2000 and for the
period between October 23 and December 31, 2000 have been prepared in conformity
with Chilean GAAP, and include the assets, liabilities and results of HQI
Transelec Chile S.A. and 99.99% of its subsidiary, Transelec. All significant
balances and transactions among the companies have been eliminated in
consolidation, as well as unrealized gains on losses arising from such
transactions. The participation of minority shareholders in the subsidiary has
been given effect in the consolidated financial statement under Minority
interest.
b) BASIS OF PRESENTATION OF THE COMBINED STATEMENTS OF INCOME AND STATEMENTS
OF CASH FLOWS OF THE TRANSMISSION BUSINESS
The combined statements of income and of cash flows have been prepared in
accordance with Chilean GAAP.
The combined statements of income and of cash flows for the year ended
December 31, 1999 and for the period from January 1, 2000 to October 22, 2000,
represent the Transmission Business acquired from Endesa and combine the
historical statements of income and of cash flows of Transelec and the Injected
Assets on a carve-out basis. The financial information related to the Injected
Assets was derived from Endesa's historical accounting records and reflects
revenues, expenses and cash flows that were directly related to the Injected
Assets as they were operated within Endesa. All significant transactions between
Transelec and the Injected Assets have been eliminated in combination, as well
as unrealized gains and losses arising from such transactions.
F-13
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
The financial information related to the Injected Assets includes
allocations of general corporate overhead expenses related to the corporate
headquarters and common support activities of the Transmission Business,
including information technology, financial, treasury, legal insurance and other
corporate functions as well as certain costs of operations including office rent
and facility charges. Corporate administrative and selling costs not
specifically attributable to the Injected Assets have been allocated to the
Transmission Business pro rata based on operating revenues.
Debt and interest expense have been allocated to the Injected Assets based
on Endesa's overall borrowings and interest expense. Dividends related to
earnings attributable to the Injected Assets have been accrued consistent with
Transelec's dividend policy and are deemed paid through the intercompany
account.
All of the allocations and estimates in the combined statements of income
and cash flows of the Transmission Business are based on assumptions management
believes are reasonable under the circumstances. However, these allocations and
estimates are not necessarily indicative of the costs and expenses that would
have resulted if the Transmission Business had operated as a separate entity.
c) PRICE-LEVEL RESTATEMENTS
Price-level restatements consists of three components as follows: i)
restatements for the effects of variations in purchasing power of the Chilean
peso; ii) restatements of monetary assets and liabilities denominated in
index-linked Unidades de Fomento units ("UF"); and iii) restatements of assets
and liabilities denominated in foreign currencies.
i) RESTATEMENTS FOR THE EFFECTS OF VARIATIONS IN PURCHASING POWER OF
THE CHILEAN PESO
These financial statements, which are expressed in Chilean pesos, have been
restated to reflect the effects of variations in the purchasing power of the
local currency during each year.
For this purpose, and in conformity with current Chilean regulations,
non-monetary assets and liabilities, equity accounts and the income and expense
accounts have been restated in terms of year-end constant pesos. The resulting
net charge or credit to income arises as a result of the gain or loss in
purchasing power from the holding of monetary assets and liabilities exposed to
the effects of inflation.
In accordance with Chilean tax regulations and accounting practices, the
restatements were calculated based on the official Consumer Price Index of the
National Institute of statistics, which was 2.6%, 3.6%, 1.1% and 3.1% for the
year ended December 31, 1999, the periods from January 1, 2000 to October 22,
2000 and from October 23, 2000 to December 31, 2000, and for the year ended
December 31, 2001, respectively. This index is considered by the business
community, the accounting profession and the Chilean government to be the index
which most closely complies with the technical requirement to reflect the
variation in the general level of prices in the country and, consequently, is
widely used for the financial reporting purposes in Chile. For comparative
purposes, the financial statements for the year ended December 31, 1999, the
periods from January 1, 2000 to October 22, 2000 and October 23, 2000 to
December 31, 2000 as well as for the year ended December 31, 2001, and amounts
disclosed in the related notes, have been restated in terms of Chilean pesos of
December 31, 2001 purchasing power.
F-14
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
The above-mentioned price-level restatements do not purport to present
appraised or replacement values and are only intended to restate all
non-monetary financial statement components in terms of local currency of a
single purchasing power and to include in the net result for each year the gain
or loss in purchasing power arising from the holding of monetary assets and
liabilities exposed to the effects of inflation.
ii) ASSETS AND LIABILITIES DENOMINATED IN UFs
Certain assets and liabilities are denominated in UFs. Each UF was
equivalent to Ch$15,066.96 at December 31, 1999, Ch$15,769.92 at December 31,
2000 and Ch$16,262.66 at December 31, 2001. Increases and decreases in UFs are
recorded in income.
iii) ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCY
Assets and liabilities in foreign currency included in the balance sheets
and detailed in Note 13 have been translated into Chilean pesos at the Observed
Exchange Rates determined by the Central Bank of Chile in effect at each period
end (historical rates of Ch$530.07 per US$1 at December 31, 1999, Ch$573.65 per
US$1 at December 31, 2000 and Ch$ 654.79 per US$1 at December 31, 2001).
Transaction gains and losses are recorded in income.
d) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
e) TIME DEPOSITS
Investments in time deposits are recorded at cost plus accrued interest and
price-level restatements at each year end.
f) MARKETABLE SECURITIES
Marketable securities include investments in mutual funds which are valued
at their quoted market value at each year end.
g) TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are stated at estimated realizable values.
Allowances are recorded, when necessary, in an amount considered by management
to be sufficient to meet probable future losses related to uncollectible
accounts. Based on an aging of its trade accounts receivable, the Company
determined that no significant uncollectable accounts existed as of December 31,
2000 and 2001, and accordingly, no allowance was recorded.
F-15
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
h) RESALE AGREEMENTS
Other current assets include purchases under resale agreements, which are
recorded at their initial investment value at purchase date plus accrued
interest and price-level restatements.
i) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost plus price-level
restatement, less accumulated depreciation. Expenditures for significant
improvements, or replacement parts, which extend the useful life of an asset for
more than one year, are capitalized while maintenance and repair costs are
expensed as incurred. Property, plant and equipment, less salvage value of 5%
for assets purchased until 1999, are depreciated using the straight-line method
over the estimated useful lives.
Property, plant and equipment are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to the future net cash flows
expected to be generated by the asset. If such assets are considered impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Fair value is based on
current appraisal values.
During 2001, the remaining useful lives of some assets (including lines and
electrical equipment) were modified, extending the period for depreciation by an
average of 25 years.
j) GOODWILL
Goodwill represents the difference between the purchase value of shares of
Transelec and the proportional equity value of the investment on the purchase
date amortized over a 20-year period.
k) INTANGIBLES
Intangibles consist of rights of way that are amortized, beginning in 1998,
on a straight-line basis over 40 years in accordance with Technical Bulletin
No. 55 of the Chilean Institute of Accountants.
l) BONDS PAYABLE
This item includes, in long-term, the obligation incurred through the
issuance of bonds by the Company at nominal value plus price-level restatements
at year end and, in short-term, accrued interest at year end. The difference
between the nominal value and the placement value is amortized on a
straight-line basis until maturity and is presented in Other current assets and
Other long-term assets.
F-16
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
m) SEVERANCE INDEMNITIES
The provision for severance payments contracted with personnel, who acquire
such rights when they have completed 15 years service, is shown at the present
value of the future estimated cost of the benefit, using an annual interest rate
of 6.5% (9.5% in 1999) and assuming an average tenure in the Company of 35
years. With respect to those employees with less than 15 years of service, an
average of 75% of the benefit has been accrued at present value.
n) EMPLOYEE VACATIONS
In conformity with Technical Bulletin No. 47 issued by the Chilean
Institute of Accountants, the annual cost of employee vacations is recorded as
an expense in the financial statements on an accrual basis.
o) REVENUE RECOGNITION
The Company recognizes in net sales revenue from tolls and transmission
charges when electricity is transmitted and service revenue when services are
provided. The Company recognizes adjustments to income arising from arbitration
proceedings when decisions are received.
p) INCOME TAXES AND DEFERRED INCOME TAXES
The Company has recognized its current tax obligations in conformity with
current legislation.
As from January 1, 2000, the effects of deferred income taxes arising from
temporary differences between the basis of assets and liabilities for tax and
financial statement purposes are recorded in accordance with Technical Bulletin
No. 60 of the Chilean Institute of Accountants, considering the tax rate at the
estimated date of reversal. Deferred income taxes at January 1, 2000 that were
not previously recorded were recognized in the balance sheet along with
equivalent contra accounts so that there was no impact related to the adoption
of the standard at January 1, 2000. The contra accounts will be amortized over
the period of reversal of the deferred income tax asset or liability to which
they relate, so that there is no effect on results related to the deferred
income taxes recognized at January 1, 2000. However, as the temporary
differences that gave rise to these tax assets and liabilities reverse, they
will be reflected in the current income tax expense of the Company beginning in
2000.
Until December 31, 1999, deferred income taxes were recorded on the basis
of timing differences between tax and financial results that were not going to
be offset by new timing differences of a similar nature.
F-17
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
q) DERIVATIVE CONTRACTS
As of December 31, 2000 and 2001, the Company maintained derivative hedging
contracts designed to minimize exposure to the risk associated with fluctuations
in exchange rates with respect to exchange positions in foreign currency
denominated assets and liabilities.
The hedging contracts entered into by the Company included foreign exchange
forward contracts and swaps and were recorded at fair value as either assets or
liabilities in the balance sheet. At December 31, 2000 and 2001, the Company
maintained a net loss position with the aforementioned derivatives and
unrealized losses were recognized as a charge to income.
r) DEBT SECURITY ISSUANCE AND PLACEMENT EXPENSES
The Company has deferred the expenses incurred in the issuance and
placement of debt obligations during 2001. These deferred charges are recorded
under Other long-term and short-term assets, and are amortized using the
straight-line method until maturity of the obligations.
s) STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid instruments purchased with an original maturity of three months or
less, including securities purchased under resale agreements, to be cash
equivalents.
Cash flows from operating activities include all cash flows related to
primary operating activities of the Company and include interest paid, interest
income and, in general, all cash flows that are not defined as investing or
financing activities. The concept of operations used in this statement is
broader than that used in the statement of income.
The balances of cash and cash equivalents were as follows:
TRANSMISSION BUSINESS
(COMBINED) HQI TRANSELEC
------------------------------- -------------------------------------
FOR THE YEAR FOR THE YEAR
ENDED FOR THE PERIODS FROM ENDED
------------- --------------------------------- -------------
DEC. 31, 1999 JAN. 1, 2000 TO OCT. 23, 2000 TO DEC. 31, 2001
OCT. 22, 2000 DEC. 31, 2000
------------- --------------- ---------------- -------------
(CONSOLIDATED)
ThCh$ ThCh$ ThCh$ ThCh$
Cash 205,138 115,706 90,562 119,762
Time deposits - - 19,045,122 81,862,818
Marketable securities - - 2,019,472 2,960,188
Securities purchased under resale agreements - - 2,373,698 4,420,039
------------- --------------- -------------- -------------
Total 205,138 115,706 23,528,854 89,362,807
============= =============== ============== =============
F-18
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
NOTE 4 - ACCOUNTING CHANGES
Effective January 1, 2000, the Company began applying Technical Bulletin
No. 60 of the Chilean Institute of Accounting concerning deferred income taxes.
This bulletin requires the recognition of deferred income taxes for all
temporary differences, whether recurring or not, using an asset and liability
approach. This change resulted in a net charge (credit) to income for the period
from January 1, 2000 to October 22, 2000 and from October 23, 2000 to December
31, 2000 of ThCh$ 3,478,823 and ThCh$ (258,889), respectively.
The cumulative effect of this accounting change for the years prior to 2000
resulted in the recognition of a net deferred tax liability and an offsetting
net asset (contra account) of ThCh$ 948,478 at January 1, 2000. The liability
and the asset are being offset over the projected period of reversal of such
temporary differences without affecting net income. However, there will be an
effect on future results arising from the recognition of the reversal of these
temporary differences in the current income tax provisions of such periods.
As discussed in Note 3 i), the Company changed the useful life of some
assets included in property, plant and equipment, resulting in a decrease in the
charge to income for depreciation during 2001 of approximately ThCh$ 5,240,000.
NOTE 5 - PRICE-LEVEL RESTATEMENTS
The price-level restatements were as follows:
TRANSMISSION BUSINESS
(COMBINED) HQI TRANSELEC
------------------------------- -------------------------------------
FOR THE YEAR FOR THE YEAR
ENDED FOR THE PERIODS FROM ENDED
------------- --------------------------------- -------------
DEC. 31, 1999 JAN. 1, 2000 TO OCT. 23, 2000 TO DEC. 31, 2001
OCT. 22, 2000 DEC. 31, 2000
------------- --------------- ---------------- -------------
(CONSOLIDATED)
ThCh$ ThCh$ ThCh$ ThCh$
Restatement of:
Fixed and other assets 11,256,210 14,344,537 6,570,822 21,847,904
Exchange differences (9,365,455) (7,669,250) (1,980,437) (22,362,892)
Swap contracts - - - (9,502,494)
Forward exchange contracts (961,226) (2,331,935) (2,174,210) 1,786,570
UF adjustments (3,645,713) (4,071,655) 207,806 (13,932,198)
Other liabilities (202,604) - (4,875) -
Shareholders' equity (4,842,053) (6,096,623) (3,154,918) (9,712,895)
------------- --------------- -------------- -------------
Net result of restatement of assets and liabilities (7,760,841) (5,824,926) (535,812) (31,876,005)
Income statement accounts (618,355) (624,112) (415,236) (1,018,541)
------------- --------------- -------------- -------------
Net price-level restatements (8,379,196) (6,449,038) (951,048) (32,894,546)
============= =============== ============== =============
F-19
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
NOTE 6 - TIME DEPOSITS
Time deposits were as follows:
AT DECEMBER 31,
--------------------------------------------------------------------------
2000 2001
--------------------------------- ----------------------------------
(CONSOLIDATED)
CURRENCY OR CURRENCY OR
BANK INDEXATION UNITS ThCh$ INDEXATION UNITS ThCh$
- ---- ---------------- ---------- ----------------- ----------
Bank of America Nominal pesos 1,665,118 - -
Banco Santander Nominal pesos 1,892,653 - -
Banco Corp Banca Nominal pesos 1,728,912 - -
Banco de Chile Nominal pesos 2,290,243 US$ 6,558,412
Banco Security Nominal pesos 443,578 US$ 997,153
Scotiabank (Banco Sudamericano) Nominal pesos 1,846,558 US$ 5,903,623
Banco Credito e Inversiones Nominal pesos 2,281,527 - -
Banco Santiago Nominal pesos 2,603,032 US$ 3,978,576
Banco Bice Nominal pesos 1,122,831 - -
Citibank Nominal pesos 769,580 US$ 9,794,717
Dresdner Banque Nat. de Paris Nominal pesos 1,599,754 US$ 14,583,776
Banco Edwards - - US$ 13,972,593
Banco BBVA BHIF - - US$ 4,943,077
Banco ABN Amro - - US$ 14,501,166
Banco HSBC - - US$ 6,629,725
Banco del Desarrollo Indexed Pesos 801,336 - -
---------- ----------
Total 19,045,122 81,862,818
========== ==========
NOTE 7 - MARKETABLE SECURITIES
Marketable securities included investments in money market mutual funds as
follows:
AT DECEMBER 31,
-----------------------------------------------------
2000 2001
----------------------- -----------------------
(CONSOLIDATED)
ThCh$ ThCh$
FINANCIAL INSTITUTION
- ---------------------
BHIF 542,002 580,884
Banchile 596,747 481,662
Citicorp 632,389 18,546
Santander 248,334 300,264
Santiago - 655,254
Sudamericano - 500,367
Credito e Inversiones - 423,211
----------------------- -----------------------
Total 2,019,472 2,960,188
======================= =======================
F-20
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
NOTE 8 - TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable were as follows:
AT DECEMBER 31,
-----------------------------------------------------
2000 2001
----------------------- -----------------------
ThCh$ ThCh$
(CONSOLIDATED)
Tolls and transmission charges - Endesa and subsidiaries 6,505,948 6,187,092
Tolls and transmission charges - other customers 1,389,042 2,356,081
Services provided to other parties 228,393 391,405
----------------------- -----------------------
Total 8,123,383 8,934,578
======================= =======================
NOTE 9 - OTHER ASSETS
a) Other current assets were as follows:
AT DECEMBER 31,
-----------------------------------------------------
2000 2001
----------------------- -----------------------
ThCh$ ThCh$
(CONSOLIDATED)
Securities purchased under resale agreements (1) 2,373,698 4,420,039
Inventories 35,245 78,782
Miscellaneous receivables 337,071 276,722
Prepaid expenses 452,628 655,072
Deferred expenses on bond placements (Note 23) - 1,052,476
Deferred discount on bond placements - 592,349
Other 122,672 14,174
----------------------- -----------------------
Total 3,321,314 7,089,614
======================= =======================
(1) At December 31, 2000 and 2001, the Company had resale agreements of
promissory notes with various banks in Chile. The agreements had maturities
between January 8 and January 25, 2001 and between January 2 to January 17,
2002, respectively. The monthly average interest rates on the resale agreements
was 0.66% and 0.52% for 2000 and 2001, respectively.
F-21
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
b) Other long-term assets were as follows:
AT DECEMBER 31,
-----------------------------------------------------
2000 2001
----------------------- -----------------------
ThCh$ ThCh$
(CONSOLIDATED)
Deferred expenses on bond placements (Note 23) - 7,930,806
Miscellaneous receivables 654,022 441,858
Deferred discount on bond placements - 3,968,247
Payments in advance - 290,448
Other 38,247 60,539
----------------------- -----------------------
Total 692,269 12,691,898
======================= =======================
NOTE 10 - PROPERTY, PLANT AND EQUIPMENT
a) Depreciation for the year ended December 31, 1999, and for the periods
from January 1, 2000 to October 22, 2000 and from October 23, 2000 to December
31, 2000 and for the year ended December 31, 2001, amounted to ThCh$ 18,588,250,
ThCh$ 18,783,157, ThCh$ 3,758,528 and ThCh$ 14,885,188, respectively.
Depreciation is determined by the straight-line method based on the estimated
useful lives of the price-level restated assets, summarized as follows:
<Table>
<Caption>
Years
---------
Buildings and infrastructure 35 - 65
Machinery and equipment 10 - 35
Technical revaluation 40
Other fixed assets 10
</Table>
b) No interest expense was capitalized during the year ended December 31,
1999, the periods from January 1, 2000 to October 22, 2000 and October 23, 2000
to December 31, 2000, nor for the year ended December 31, 2001.
c) Capital lease
On June 26, 1998, Transelec and Endesa entered into the Capital Lease
containing a purchase option through which Transelec received form Endesa assets
whose net book value, as of May 31, 1998, amounted to ThCh$ 177,230,517
(historical). Such assets were recorded in Other fixed assets as of December 31,
1999.
The Capital Lease had a duration of 96 months starting from June 30, 1998
and terminating on May 31, 2006. The Capital Lease agreement was extinguished
with HQI Transelec's acquisition of the Transmission Business from Endesa on
October 23, 2000 as discussed in Note 2.
F-22
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
d) Impairment charge
Due to a significant decrease in the fair value of certain assets, the
Transmission Business performed a review of property, plant and equipment during
the year ended December 31, 1999 and recorded an impairment provision of ThCh$
2,903,739 in Other non-operating expenses.
e) Changes in estimate
During the period from January 1, 2000 to October 22, 2000, the
Transmission Business made a review of the asset values related to the Injected
Assets. For certain fully depreciated assets the residual values were adjusted
to one peso. The effect of this change in estimate was to increase depreciation
expense for the period by ThCh$ 1,834,184.
During 2001, the Company reviewed the remaining useful lives of lines and
electrical equipment. The useful lives of certain assets were modified,
extending the period for depreciation by an average of 25 years. The effect of
the change resulted in a decrease in the charge to income for depreciation
during 2001 of approximately ThCh$ 5,240,000.
NOTE 11 - GOODWILL
Goodwill arose as a result of the acquisition of Transelec as described in
Note 2. The accumulated amortization at December 31, 2000 and December 31, 2001
amounted to ThCh$ 1,209,826 and ThCh$ 6,646,494 respectively. The goodwill is
being amortized over a term of twenty years.
AT DECEMBER 31,
-----------------------------------------------------
2000 2001
----------------------- -----------------------
ThCh$ ThCh$
(CONSOLIDATED)
Opening balance 124,439,240 124,439,240
Transfer to deferred income taxes (1) - (20,861,770)
Opening equity balance difference (Note 2) - 1,998,404
----------------------- -----------------------
124,439,240 105,575,874
Amortization of goodwill (1,209,826) (6,646,494)
----------------------- -----------------------
Total 123,229,414 98,929,380
======================= =======================
(1) Corresponds to the deferred income tax asset generated by the
allocation for income tax purposes of goodwill to property, plant and
equipment as a result of the absorption of Transelec by HQI Transelec.
Consequently, goodwill was reduced by the equivalent amount of the
deferred tax created by the difference in basis for tax and financial
statement purposes.
F-23
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
NOTE 12 - SHORT-TERM BANK LOANS
At December 31, 2000 and 2001, HQI Transelec had ThCh$ 7,957,450 and ThCh$
1,000,000 respectively of short-term lines of credit that were unused and
available for borrowing on an unsecured basis.
NOTE 13 - ASSETS AND LIABILITIES IN FOREIGN CURRENCY
Assets and liabilities in foreign currency were presented in Chilean pesos
at the respective exchange rates at the close of each year. These assets and
liabilities were as follows:
AT DECEMBER 31,
-----------------------------------------------------
2000 2001
----------------------- -----------------------
(CONSOLIDATED)
ThCh$ ThCh$
Assets
- ------
Cash (US$) 63,562 10,878
Time deposits (US$) 19,045,122 81,862,818
Notes and accounts receivable from related companies (US$) - 2,389,387
Miscellaneous receivables-long term (UF) 654,022 441,858
Notes and accounts receivable
from related companies - long-term (US$) - 72,819,412
----------------------- -----------------------
Total assets 19,762,706 157,524,353
======================= =======================
AT DECEMBER 31,
-----------------------------------------------------
2000 2001
----------------------- -----------------------
(CONSOLIDATED)
ThCh$ ThCh$
Liabilities
- -----------
Notes and accounts payable to related companies (US$) 321,911,503 270,159
Interest payable (UF) - 3,045,593
Interest payable (US$) 5,272,850
Forward contracts (US$) - 592,800
Bonds payable (UF) - 149,616,472
Bonds payable (US$) - 304,477,350
Other current liabilities (US$) 27,259 -
Other long-term liabilities (UF) 68,045 -
Swap contracts (US$ / UF) - 12,266,406
----------------------- -----------------------
Total liabilities 322,006,807 475,541,630
======================= =======================
F-24
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
NOTE 14 - ACCRUED LIABILITIES
Accrued liabilities were as follows:
AT DECEMBER 31,
-----------------------------------------------------
2000 2001
----------------------- -----------------------
(CONSOLIDATED)
ThCh$ ThCh$
Short term
- ----------
Staff severance indemnities (a) 40,225 -
Accrued payroll and other benefits 502,697 625,118
Accrued employee vacations 422,050 389,241
Additional purchase price (Note 2) 722,990 -
Other accruals 22,306 107,303
----------------------- -----------------------
Total short-term 1,710,268 1,121,662
======================= =======================
Long term
- ---------
Staff severance indemnities (a) 1,230,145 1,299,299
Swap contracts (b) - 12,266,406
----------------------- -----------------------
Total long-term 1,230,145 13,565,705
======================= =======================
a) The charge to income for staff severance indemnities for the year ended
December 31, 1999, for the periods from January 1, 2000 to October 22,
2000 and from October 23, 2000 to December 31, 2000, and for the year
ended December 31, 2001 amounted to ThCh$ 1,026,914, ThCh$ 382,541,
ThCh$ 89,544 and ThCh$ 100,074, respectively.
b) See Note 24 for a detailed description of the swap contracts.
NOTE 15 - SHORT-TERM AND LONG-TERM OBLIGATIONS (PROMISSORY NOTES AND BONDS)
a) Chilean bonds
On April 2, 2001 the Company registered its first bond issue for a maximum
of UF 10,000,000 with the Superintendent of Securities and Insurance Companies.
Of this amount, UF 9,200,000 were sold on April 16, 2001.
The terms of these bonds are as follows:
Issuer : HQI Transelec
Securities issued : Bearer bonds in local currency, denominated in UFs.
F-25
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
Maximum issueable : 10,000,000 Unidades de Fomento divided into
SERIES A
Series A-1 : Up to UF 3,000,000 (3,000 bonds at UF 1,000 each).
Series A-2 :Up to UF 4,000,000 (400 bonds at UF 10,000 each).
SERIES B
Series B-1: Up to UF 1,000,000 (1,000 bonds at UF 1.000 each).
Series B-2: Up to UF 3,000,000 (300 bonds at UF 10,000 each).
Indexation : Change in UF
Maturity : Series A in 6 years and Series B in 21 years.
Capital amortization: Series A, in one installment, upon maturity, and Series B, payable half-yearly,
in increasing amounts, commencing September 1, 2007.
Early redemption : Series A: No early redemption and Series B: commencing September 1, 2009 on
any of its stated payment dates of interest or interest and capital amortization.
Interest rate : Series A and B bonds accrue at 6.20% annual interest rate on the outstanding capital,
expressed in UFs. Interest is calculated over a period of 360 days,
upon maturity and payable half-yearly.
Interest payments : Half-yearly payments on March 1 and September 1 starting September 1, 2001.
Interest accrued at year-end amounts to ThCh$ 3,045,593 and is presented in Current liabilities.
Guarantees: : This issue has no special guarantees, except for the general guarantee on all of the issuer's assets.
Period of placement : 36 months, as from the date of registration with the Superintendent of
Securities and Insurance Companies.
b) Foreign bonds
The Company issued and sold its bonds in the international market on April 17,
2001 as follows:
Issuer : HQI Transelec
Securities issued : US$ (Yankee Bonds) traded in the U.S. market.
Issue value : ThUS$ 465,000 of a single series.
Indexation : Change in United States dollar.
Maturity The bonds mature on April 15, 2011.
Nominal interest rate : 7.875% per annum.
Interest payments : On April 15 and October 15 each year, commencing on October 15, 2001.
Interest accrued at year-end amounts to ThCh$ 5,272,850 and is presented in Current liabilities.
On September 5, 2001, these bonds were exchanged for publically tradable bonds
with the identical terms pursuant to a registration statement on Form F-4
declared effective by the Securities and Exchange Commission of the United
States on July 26, 2001.
F-26
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
c) LONG-TERM BONDS PAYABLE
Long-term bonds payable at December 31, 2001 were as follows:
NOMINAL
AMOUNT INTEREST FINAL AMORTIZATION AT
DESCRIPTION (1) CURRENCY SERIES PLACED RATE MATURITY PAYMENTS DEC. 31, 2001
- --------------- -------- ------- ----------- -------- ---------- -------------- ---------------
ThCh$
Chilean bonds UF A1 2,000,000 6.20% 03/01/2007 At maturity 32,525,320
Chilean bonds UF A2 4,000,000 6.20% 03/01/2007 At maturity 65,050,640
Chilean bonds UF B1 200,000 6.20% 03/01/2022 From 2007 3,252,532
Chilean bonds UF B2 3,000,000 6.20% 03/01/2022 From 2007 48,787,980
Foreign bonds USD$ Sole 465,000,000 7.875% 04/15/2011 At maturity 304,477,350
---------------
TOTAL LONG-TERM BONDS PAYABLE 454,093,822
===============
(1) Interest payments for the bonds are on a semi-annual basis.
NOTE 16 - OTHER CURRENT LIABILITIES
Other current liabilities were as follows:
AT DECEMBER 31,
-----------------------------------------------------
2000 2001
----------------------- -----------------------
(CONSOLIDATED)
ThCh$ ThCh$
Miscellaneous creditors 1,583,986 2,275,787
Employee benefit and tax withholdings 1,399,822 1,304,247
Forward contracts - 592,980
Other 20,597 12,623
----------------------- -----------------------
Total 3,004,405 4,185,637
======================= =======================
F-27
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
NOTE 17 - INCOME TAXES AND DEFERRED INCOME TAXES
a) The income tax provisions in the statements of income were as follows:
TRANSMISSION BUSINESS
(COMBINED) HQI TRANSELEC
------------------------------- -----------------------------------
FOR THE YEAR FOR THE YEAR
ENDED FOR THE PERIODS FROM ENDED
------------- --------------------------------- -------------
DEC. 31, 1999 JAN. 1, 2000 TO OCT. 23, 2000 TO DEC. 31, 2001
OCT. 22, 2000 DEC. 31, 2000
------------- --------------- ---------------- -------------
(CONSOLIDATED)
ThCh$ ThCh$ ThCh$ ThCh$
Current provision for income tax (2,501,663) (985,574) (944,314) (14,331)
Deferred income taxes - (1,789,646) 244,767 517,351
Other charges (1) - - - (1,248,349)
------------- --------------- -------------- --------------
Total (2) (2,501,663) (2,775,220) (699,547) (745,329)
============= =============== ============== ==============
(1) At December 31, 2001, the Company had not provided for income tax due to
tax losses amounting to ThCh$ 17,042,607. Nonetheless, as a result of the
merger with Transelec, on March 31, 2001 the Company paid income taxes
amounting to ThCh$ 1,248,349, corresponding to the taxable income of the
subsidiary for the period between January 1 and 31, 2001.
(2) At December 31, 2001, the Company originally did not record a deferred
income tax asset for the temporary difference arising from the swap
contracts (Note 24) and overstated the deferred income tax asset for tax
loss benefits. The net deferred tax asset originally not recorded at
December 31, 2001 and the effect on net income for the year then ended
amounted to ThCh$ 152,855.
In accordance with Technical Bulletin No. 14 of the Chilean Institute of
Accounting, the Company has decided to restate its comparative interim
financial statements at June 30, 2002 to correct the aforementioned
errors committed in the financial statements for the year ended December
31, 2001. Under Chilean GAAP, when presenting comparative financial
statements, errors committed in prior periods should be adjusted
retroactively for the period in which they occurred.
The balance sheet of HQI Transelec as of December 31, 2001 and the
related statements of income and of cash flows for the year then ended,
presented herein, have been restated to reflect the net adjustment
referred above and its effect is summarized as follows:
FOR THE YEAR ENDED DECEMBER 31, 2001
---------------------------------------------------------
ORIGINALLY REPORTED ADJUSTMENT AS RESTATED
------------------- ------------ ------------
ThCh$ ThCh$ ThCh$
Loss before income taxes (4,443,881) - (4,443,881)
Income taxes (898,184) 152,855 (745,329)
------------------- ------------ ------------
NET LOSS (5,342,065) 152,855 (5,189,210)
=================== ============ ============
F-28
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
b) Net recoverable income taxes were as follows:
AT DECEMBER 31,
-----------------------------------------------------
2000 2001
----------------------- -----------------------
(CONSOLIDATED)
ThCh$ ThCh$
Provisional monthly income tax prepayments 2,044,602 1,494,201
Tax provision (1,929,888) (14,331)
Other (9,517) -
----------------------- -----------------------
Net recoverable taxes 105,197 1,479,870
======================= =======================
c) Deferred income taxes
Effective January 1, 2000, the Company began applying Technical Bulletin
No.60 of the Chilean Institute of Accountants concerning deferred income taxes.
In conformity with the principle described in Note 3 p), deferred income taxes
have been adjusted in 2001 to recognize the effect of the changes in the rate
introduced by the tax reform enacted in September 2001.
Deferred income tax balances at December 31, 2000 were as follows:
DEFERRED ASSETS DEFERRED LIABILITIES
TEMPORARY DIFFERENCES CURRENT LONG-TERM CURRENT LONG-TERM
- --------------------- --------- ----------- --------- -----------
ThCh$ ThCh$ ThCh$ ThCh$
Property, plant and equipment - - - 3,499,577
Accrued staff severance indemnities - - - 124,653
Accrued employee vacations 63,308 - - -
Other accruals 340,988 - - -
--------- ----------- --------- -----------
Sub total 404,296 - - 3,624,230
Contra asset for long-term deferred income taxes payable - - - (1,675,054)
--------- ----------- --------- -----------
Total 404,296 - - 1,949,176
========= =========== ========= ===========
F-29
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
Deferred income tax balances at December 31, 2001 were as follows:
DEFERRED ASSETS DEFERRED LIABILITIES
TEMPORARY DIFFERENCES CURRENT LONG-TERM CURRENT LONG-TERM
- --------------------- --------- ----------- --------- -----------
ThCh$ ThCh$ ThCh$ ThCh$
Property, plant and equipment - 16,058,238 - -
Accrued staff severance indemnities - - - 119,819
Accrued employee vacations 62,279 - - -
Prepaid expenses - - - 1,527,158
Swaps and forward contracts 94,877 708,292 - -
Tax loss benefit - 2,736,270 - -
Other accruals 22,753 - - -
--------- ----------- --------- -----------
Sub total 179,909 19,502,800 - 1,646,977
Contra asset for long-term deferred income taxes payable - 1,799,001 - -
--------- ----------- --------- -----------
Total 179,909 21,301,801 - 1,646,977
========= =========== ========= ===========
The unamortized contra account corresponds to the accumulated effect of
deferred income taxes that were not recorded until January 1, 2000 when
Technical Bulletin No.60 was adopted. This contra asset account is amortized
over the weighted average terms of reversal of the corresponding temporary
differences, which is estimated at 25 years.
F-30
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
NOTE 18 - CHANGES IN SHAREHOLDERS EQUITY
a) Changes in capital and reserve accounts for the year ended December 31,
1999, and for the periods from January 1, 2000 to October 22, 2000 and from
October 23, 2000 to December 31, 2000, and for the year ended December 31, 2001
were as follows (in historical amounts, with restatement of final balances each
year for comparative purposes):
NUMBER OF NET
SHARES COMMON OTHER RETAINED INCOME INTERIM TOTAL
TRANSMISSION BUSINESS ISSUED STOCK RESERVES EARNINGS (LOSS) DIVIDENDS EQUITY
- ------------------------------ ------------ ----------- ---------- ---------- ----------- ----------- -----------
ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
Balances at December 31, 1998
(historical) 986,065,128 150,916,709 20,676,456 47,902 20,753,030 (13,391,814) 179,002,283
Allocation of 1998 net income - - - 7,361,216 (20,753,030) 13,391,814 -
Payment of dividend - - - (7,401,320) - (12,039,817) (19,441,137)
Price-level restatements of equity - 3,923,834 537,588 66,815 - (42,598) 4,485,639
Net income for the year - - - - 15,562,734 - 15,562,734
------------ ----------- ---------- ---------- ----------- ----------- -----------
Balances at December 31, 1999
(historical) 986,065,128 154,840,543 21,214,044 74,613 15,562,734 (12,082,415) 179,609,519
============ =========== ========== ========== =========== =========== ===========
Balances at December 31, 1999
restated to constant pesos of
December 31, 2001 - 167,143,709 22,899,648 80,541 16,799,303 (13,042,448) 193,880,753
============ =========== ========== ========== =========== =========== ===========
Balances at December 31, 1999
(historical) 986,065,128 154,840,543 21,214,044 74,613 15,562,734 (12,082,415) 179,609,519
Allocation of 1999 net income - - - 5,448,616 (15,562,734) 12,082,415 1,968,297
Payment of dividend - - - (5,422,792) - (7,571,488) (12,994,280)
Price-level restatements of equity - 5,459,379 821,873 2,686 - (434,967) 5,848,971
Net income for the period - - - - 15,347,397 - 15,347,397
------------ ----------- ---------- ---------- ----------- ----------- -----------
Balances at October 22, 2000
(historical) 986,065,128 160,299,922 22,035,917 103,123 15,347,397 (8,006,455) 189,779,904
============ =========== ========== ========== =========== =========== ===========
Balances at October 22, 2000
restated to constant pesos of
December 31, 2001 - 167,087,181 22,968,940 107,489 15,997,221 (8,345,456) 197,815,375
============ =========== ========== ========== =========== =========== ===========
HQI TRANSELEC
- ----------------------------
Balances at October 23, 2000
(historical) 999,900 307,049,463 - - - - 307,049,463
Capital increase 100 30,952 - - - - 30,952
Price-level restatements of equity - 3,060,056 - - - - 3,060,056
Net income for the period - - - - 3,178,720 - 3,178,720
------------ ----------- ---------- ---------- ----------- ----------- -----------
Balances at December 31, 2000 1,000,000 310,140,471 - - 3,178,720 - 313,319,191
============ =========== ========== ========== =========== =========== ===========
Balances at December 31, 2000
restated to constant pesos of
December 31, 2001 - 319,754,826 - - 3,277,260 - 323,032,086
============ =========== ========== ========== =========== =========== ===========
Balances at December 31, 2000
(historical) 1,000,000 310,140,471 - - 3,178,720 - 313,319,191
Allocation of 2000 net income - 3,178,720 (3,178,720) -
Price-level restatements of equity - 9,614,355 - 98,540 - - 9,712,895
Net loss for the year - - - - (5,189,210) - (5,189,210)
------------ ----------- ---------- ---------- ----------- ----------- -----------
Balances at December 31, 2001 1,000,000 319,754,826 - 3,277,260 (5,189,210) - 317,842,876
============ =========== ========== ========== =========== =========== ===========
</Table>
b) Paid-in capital
According to Article No.10 of Chilean Corporate Law No.18,046, the
Transmission Business has incorporated into its paid-in capital the proportional
amount corresponding to price-level restatements of such capital as of December
31, 1999.
F-31
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
c) Capital
TRANSMISSION BUSINESS
Transelec was formed on January 28, 1993 with capital of ThCh$ 9,000,000
(historical) divided into 90,000,000 registered no-par value shares, of which,
71,870,847 shares were subscribed and paid in, leaving a balance of 18,129,163
shares to be subscribed, which, pursuant, to Article No.24 of Law No.18,046,
were cancelled upon the expiration date of their subscription period (January
27, 1996).
In the Extraordinary Shareholders' Meeting of May 14, 1998, the
shareholders approved a capital increase of ThCh$ 136,083,953 (historical)
divided into 914,194,291 registered no-par value shares, which were all
subscribed and paid in by Transelec's two sole shareholders in proportion to
their respective ownership interests. Endesa subscribed 914,102,872 shares which
were paid in through the contribution of chattels, real property, intangible
assets and other assets valued at their net book value of ThCh$ 136,070,344
(historical). Enigisa subscribed and paid in the remaining 91,419 shared in
cash, in the amount of ThCh$13,609 (historical).
In connection with the contribution of assets by Endesa, shareholders'
equity includes other reserves of ThCh$ 22,278,312, which correspond to the
technical revaluation of those assets.
HQI TRANSELEC
On September 15, 2000, HQI Transelec was founded with a capital of ThCh$
100 (historical). On October 16, 2000, the shareholders agreed to make capital
contributions of ThCh$ 340,073,800 (historical). On October 20, 2000,
Inversiones HQI Chile, the majority shareholder, contributed US$ 537,354,025
(ThCh$ 307,049,463 historical), while on October 25, 2000, HQ Puno Limited
contributed US$ 53,735 (ThCh$ 30,952 historical). Subsequently, on November 23,
2000, the shareholders agreed to lower paid-in capital to the amount previously
contributed. As a result, HQI Transelec has paid-in capital of US$ 537,407,760
(ThCh$ 319,754,826) divided into one million shares with no-par value. Chilean
peso amounts reflect the exchange rate at the time the capital contribution was
made, as adjusted for constant Chilean pesos of December 2001.
d) Shareholders' structure as of December 31, 2001
NUMBER OF
SHAREHOLDER % SHARES
- ----------- ----- ----------
Inversiones HQI Chile Holding Limitada 99.99 999,900
HQ Puno Limited 0.01 100
----- ----------
Total 100 1,000,000
===== ==========
F-32
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
NOTE 19 - COMMITMENTS AND CONTINGENCIES
a) Debt covenants
As a result of the obligations incurred in the bond offerings, the Company
is required to meet specific ratios and covenants, including:
- - Maintain at all times assets free from any encumbrance and assets with a
book value equal to or greater than one point two times the book value of
the Company's total obligations and debts that are not pledged as actual
guarantees on goods and assets owned. These obligations include debt
arising from the aforementioned bond offering.
- - Prohibition to sell, assign, transfer, contribute or dispose of the
issuer's primary assets in any way.
- - Maintain an individual and consolidated leverage ratio whereby the
proportion of Total liabilities/Total capitalization (as defined) is not
greater than zero point seven times.
- - Maintain at all times an individual and consolidated minimum equity equal
to UF 15 million.
b) Pending lawsuits
The Company is involved in legal proceedings, claims and litigation arising
in the ordinary course of business. In the opinion of the management, the
outcome of such current legal proceedings, claims and litigation will not
materially affect the Company's financial position, operating results or cash
flows.
c) Guarantees granted to third parties
At December 31, 2001, the Company had granted a performance guarantee to
Conama (Chilean government entity responsible for regulating all matters
relating to environmental protection) of ThCh$ 919,588 to cover possible
environmental damages arising from construction in progress. Management believes
that no significant environmental impact will result from the Company's work in
progress.
d) Commitments for future expenditures
On October 23, 2000, the Company signed an agreement concerning future
capital expenditures with Endesa whereby the Company is committed to making
certain capital expenditures and expansions of transmission capacity through
2005 for a total current estimated amount at December 31, 2001 of
US$ 188 million.
F-33
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
e) Guarantees obtained from third parties
At December 31, 2000 and 2001 the Company had received performance
guarantees from contractors and third parties for the completion of
construction, maintenance work and repayment of housing loans, amounting to
ThCh$ 459,056 and ThCh$ 1,366,870, respectively.
NOTE 20 - SIGNIFICANT BALANCES AND TRANSACTIONS WITH RELATED COMPANIES
a) Notes and accounts receivable
The receivable balance as at December 31, 2001 arose from a loan granted on
April 17, 2001 to Inversiones HQI Chile for US$ 169.4 million. On July 31, 2001,
Inversiones HQI Chile paid US$ 62.0 million of the total debt, of which, US$
58.1 million corresponded to capital and US$ 3.9 million to interest. The amount
due is payable in United States dollars and accrues 7.875% interest on an annual
basis of 360 days. The balance due will be paid from the dividends to be
received by Inversiones HQI Chile from HQI Transelec, first for payment of
accrued interest and then for capital amortization.
SHORT-TERM LONG-TERM
-------------------------- ----------------------------
AT DECEMBER 31, AT DECEMBER 31,
-------------------------- ----------------------------
NAME RELATIONSHIP 2000 2001 2000 2001
- ---- ------------ -------------- --------- -------------- ----------
(CONSOLIDATED) (CONSOLIDATED)
ThCh$ ThCh$ ThCh$ ThCh$
Inversiones HQI Chile Parent - 2,389,387 - 72,819,412
--------- --------- ---------- ----------
TOTAL - 2,389,387 - 72,819,412
========= ========= ========== ==========
b) Notes and accounts payable
Notes and accounts payable balances with related parties at each year end
were as follows:
SHORT-TERM AT DECEMBER 31,
- ---------- --------------------------
NAME RELATIONSHIP 2000 2001
---- ------------ -------------- -------
(CONSOLIDATED)
ThCh$ ThCh$
Inversiones HQI Chile (1) Parent 319,737,293 -
HQ (2) Ultimate parent company 2,174,210 270,159
----------- -------
TOTAL 321,911,503 270,159
=========== =======
(1) The account payable at December 31, 2000 to Inversiones HQI corresponded to
a short-term note payable, equivalent to US$ 538,646,000, used to pay for the
purchase of the Injected Assets, to extinguish certain liabilities outstanding
at October 23, 2000 with Endesa (the parent company at that time), as well as
the extinguishment of the Capital Lease (see Note 2).
F-34
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
(2) In order to hedge its exposure to fluctuations in the US dollar
exchange rate, during 2000 HQI Transelec entered into the following forward
contracts with HQ:
PURCHASE SALE
----------------------- ----------------------
PURCHASE MATURITY NET
INSTITUTION DATE DATE CURRENCY AMOUNT CURRENCY AMOUNT DIFFERENCE
- ----------- ----------- -------------- -------- ----------- -------- ----------- -----------
ThCh$ ThCh$ ThCh$
Hydro-Quebec Dec.1, 2000 April 6, 2001 US$ 11,828,663 UF 11,999,406 (170,743)
Hydro-Quebec Dec.1, 2000 April 16, 2001 US$ 35,485,989 UF 36,002,788 (516,799)
Hydro-Quebec Dec.1, 2000 April 18, 2001 US$ 11,828,663 UF 12,001,692 (173,029)
Hydro-Quebec Dec.1, 2000 April 19, 2001 US$ 11,828,663 UF 12,001,882 (173,219)
Hydro-Quebec Dec.1, 2000 April 20, 2001 US$ 5,914,332 UF 6,001,037 (86,705)
Hydro-Quebec Dec.1, 2000 April 25, 2001 US$ 11,828,663 UF 12,003,021 (174,358)
Hydro-Quebec Dec.1, 2000 April 27, 2001 US$ 5,914,332 UF 6,001,701 (87,369)
Hydro-Quebec Dec.1, 2000 April 30, 2001 US$ 11,828,663 UF 12,003,588 (174,925)
Hydro-Quebec Dec.1, 2000 May 4, 2001 US$ 11,828,663 UF 12,004,722 (176,059)
Hydro-Quebec Dec.1, 2000 May 7, 2001 US$ 23,657,326 UF 24,009,826 (352,500)
Hydro-Quebec Dec.1, 2000 May 9, 2001 US$ 5,914,332 UF 6,002,836 (88,504)
----------- ----------- ----------
Total at December 31, 2000 147,858,289 150,032,499 (2,174,210)
=========== =========== ==========
F-35
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
c) Effects on results of significant transactions
The following transactions with related companies produced significant
effects on the results of the Company:
TRANSMISSION BUSINESS HQI TRANSELEC
------------------------------- ---------------------------------
FOR THE YEAR FOR THE YEAR
ENDED FOR THE PERIODS FROM ENDED
------------- --------------------------------- -------------
DEC. 31, 1999 JAN. 1, 2000 TO OCT. 23, 2000 TO DEC. 31, 2001
COMPANY RELATIONSHIP TRANSACTION OCT. 22, 2000 DEC. 31, 2000
- ------- ------------ ----------- ------------- --------------- ---------------- -------------
(CONSOLIDATED)
ThCh$ ThCh$ ThCh$ ThCh$
Endesa Former parent Tolls and
transmission
charges 45,245,028 35,763,168 - -
Other services 6,945,207 1,132,196 - -
Services received (15,914,219) (263,569) - -
Interest income 1,056,878 2,138,931 - -
Interest expense (16,891,006) (7,204,159) - -
Loss on forward
contracts (961,226) - - -
Endesa Inversiones
Generales S.A. Former shareholder Other services 7,007 - - -
Services received (205,415) (130,134) - -
Ingendesa S.A. Subsidiary of Other services 8,548 3,242 - -
former parent
Services received (445,660) (17,887) - -
Empresa Electrica
Pangue S.A. Subsidiary of Tolls and
former parent transmission
charges 6,952,521 5,915,407 - -
Other services 20,712 9,671 - -
Autopista del Sol S.A. Subsidiary of Other services - - - -
former parent
Empresa Electrica
Pehuenche S.A. Subsidiary of Tolls and
former parent transmission
charges 11,882,998 7,453,846 - -
Other services 42,302 29,401 - -
Compania Electrica
San Isidro S.A. Subsidiary of Tolls and
former parent transmission
charges 369,152 76,268 - -
Other services 16,266 4,459 - -
Compania Elecrica
Tarapaca S.A. Subsidiary of Other services 78,579 9,944 - -
former parent
Services received (1,233) - - -
Chilectra S.A. Subsidiary of Other services 14,747 - - -
former parent
Inversiones HQI Chile
Holding Limitada Parent Interest expense - - (6,268,810) (22,787,154)
Interest income - - - 15,536,489
Hydro-Quebec Ultimate parent (Loss)/gain on
company forward contracts - - (2,174,210) 4,952,710
F-36
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
NOTE 21 - NON-OPERATING INCOME
TRANSMISSION BUSINESS HQI TRANSELEC
------------------------------- ----------------------------------
FOR THE YEAR FOR THE YEAR
ENDED FOR THE PERIODS FROM ENDED
------------- --------------------------------- -------------
DEC. 31, 1999 JAN. 1, 2000 TO OCT. 23, 2000 TO DEC. 31, 2001
OCT. 22, 2000 DEC. 31, 2000
------------- --------------- ---------------- -------------
(CONSOLIDATED)
ThCh$ ThCh$ ThCh$ ThCh$
Settlement of arbitration relating to transmission
tariffs (1) 2,150,054 2,429,575 - -
Gain on sale of inventory 378,824 - - 61,547
Gain on sale of property, plant and equipment - 104,966 - -
Prior year income - - - 208,149
Other - 32,717 25,927 2,523
------------- --------------- ---------------- -------------
Total 2,528,878 2,567,258 25,927 272,219
============= =============== ================ =============
(1) For the period from January 1, 2000 to October 22, 2000, ThCh$ 2,429,575
represented primarily the recognition in income of the final settlement
negotiated with Endesa related to amounts due for basic tolls for prior periods.
During the year ended December 31, 1999, ThCh$ 2,150,054 represented the
recognition in income of the effect of a partial settlement with Endesa
Electrica Pehuenche S.A., for amounts due in prior years.
NOTE 22 - NON-OPERATING EXPENSES
TRANSMISSION BUSINESS HQI TRANSELEC
------------------------------- ----------------------------------
FOR THE YEAR FOR THE YEAR
ENDED FOR THE PERIODS FROM ENDED
------------- --------------------------------- -------------
DEC. 31, 1999 JAN. 1, 2000 TO OCT. 23, 2000 TO DEC. 31, 2001
OCT. 22, 2000 DEC. 31, 2000
------------- --------------- ---------------- -------------
(CONSOLIDATED)
ThCh$ ThCh$ ThCh$ ThCh$
Impairment of property, plant and equipment 2,903,739 - - -
Obsolescence of inventory 692,107 - - -
Loss on sale of property, plant and equipment - 227,962 - 109,301
Directors compensation 78,296 30,377 3,572 18,785
Other 57,521 426,895 127,943 528,387
Prior year expenses - - - 151,002
Retired employee benefits - - - 121
Fiscal and judicial fines - - - 7,295
Research expenses - - - 56,517
------------- --------------- ---------------- -------------
Total 3,731,663 685,234 131,515 871,408
============= =============== ================ =============
F-37
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
NOTE 23 - DEBT ISSUANCE EXPENSES
Expenses incurred for debt obligations issued in the local and foreign markets
include: stamp tax, placement fees, legal services, financial services, risk
classification reports, and printing costs.
LOCAL FOREIGN TOTAL
--------- --------- ---------
ThCh$ ThCh$ ThCh$
Composition
- -----------
Bond issuance expenses 2,630,432 7,229,914 9,860,346
Amortization (274,571) (602,493) (877,064)
--------- --------- ---------
2,355,861 6,627,421 8,983,282
========= ========= =========
Balance sheet presentation
- --------------------------
Other current assets 329,485 722,991 1,052,476
Other long-term assets 2,026,376 5,904,430 7,930,806
--------- --------- ---------
2,355,861 6,627,421 8,983,282
========= ========= =========
F-38
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
NOTE 24 - DERIVATIVE CONTRACTS
At December 31, 2001, the Company maintained forward contracts and swaps
to hedge the risk of exchange rate fluctuations of short-term trade accounts
receivable and long-term bond payables, as follows:
CONTRACT DESCRIPTION ACCOUNTS EFFECTED
-------------------------------- ---------------------------------------------------
ITEM HEDGED
TYPE OF NOMINAL ------------------ VALUE OF ASSET/LIABILITY FAIR EFFECT IN INCOME
DERIVATIVE VALUE MATURITY TYPE OF HEDGE NAME AMOUNT HEDGED ITEM NAME VALUE(1) REALIZED UNREALIZED
- ---------- ------- ----------- ------------- -------- -------- ----------- ---------------- --------- -------- ----------
US$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
Swap 100,000,000 2nd Quarter Exchange rate US$ Bonds 67,900,000 65,479,000 Accrued liabilities 6,125,743 (73,752) (6,051,991)
2006 (US$)
Swap 50,000,000 4th Quarter Exchange rate US$ Bonds 35,830,500 32,739,500 Accrued liabilities 4,568,697 (4,568,697)
2006 (US$)
Swap 20,000,000 4th Quarter Exchange rate US$ Bonds 14,110,000 13,095,800 Accrued liabilities 1,571,966 (1,571,966)
2006 (US$)
Fwd 30,000,000 2nd Quarter Exchange rate US$ Bonds 20,535,000 19,980,000 Other current 555,000 (555,000)
2002 (US$) liabilities
Fwd 4,000,000 1st Quarter Exchange rate Trade 2,650,720 2,619,160 Other current 31,560 (31,560)
2002 (US$) receivables liabilities
Fwd 2,000,000 1st Quarter Exchange rate Trade 1,316,000 1,309,580 Other current 6,420 (6,240)
2002 (US$) receivables liabilities
----------
12,859,386
==========
(1) Balance sheet presentation
<Table>
<Caption>
2001
----------
ThCh$
Other current liabilities (Note 16) 592,980
Accrued liabilities - long term (Note 14) 12,266,406
----------
12,859,386
==========
</Table>
F-39
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
NOTE 25 - DIFFERENCES BETWEEN CHILEAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Chilean GAAP vary in certain significant respects from the accounting
principles generally accepted in the United States of America ("US GAAP"). Such
differences involve certain methods for measuring the amounts shown in the
financial statements, as well as additional disclosures required by US GAAP.
1) DIFFERENCES IN MEASUREMENT METHODS
The principal methods applied in the preparation of the accompanying
financial statements which have resulted in the amounts which differ from
those that would have otherwise been determined under US GAAP are as follows:
a) INFLATION ACCOUNTING
The cumulative inflation rate in Chile as measured by the Consumer
Price Index for the three-year period ended December 31, 2001 was
approximately 10.4%.
Chilean accounting principles require that the financial statements be
restated to reflect the full effects of the loss in the purchasing power of
the Chilean peso on the financial position and the results of operations of
reporting entities. The method, described in Note 3 c), is based on a model
which enables calculation of net inflation gains or losses caused by monetary
assets and liabilities exposed to changes in the purchasing power of the
local currency by restating all nonmonetary accounts in the financial
statements. The model prescribes that the historical cost of such accounts be
restated for general price-level changes between the date of origin of each
item and the year-end.
The inclusion of price-level adjustments in the accompanying financial
statements is considered appropriate under the prolonged inflationary
conditions affecting the Chilean economy. Accordingly, the effect of
price-level changes is not eliminated in the reconciliation to US GAAP
included under paragraph 1 m) below.
b) TRANSMISSION BUSINESS - REVALUATION OF PROPERTY, PLANT AND EQUIPMENT
As described in Note 18 c), Endesa transferred the technical revaluation
of certain property, plant and equipment to the Transmission Business as a
capital contribution. Revaluation of property, plant and equipment is an
accounting principle which is not generally accepted in the United States.
The effects of the reversal of this revaluation as well as the related
accumulated depreciation and depreciation expense for each year is shown
under paragraph 1 m) below. This adjustment for the Transmission Business is
not applicable to HQI Transelec as it is considered in the acquisition
adjustments described in paragraph 1 f) below.
F-40
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
c) TRANSMISSION BUSINESS - CAPITALIZATION OF INTEREST
Under Chilean GAAP, the capitalization of interest cost is optional. The
Transmission Business did not capitalize the interest costs incurred in
connection with the development of transmission lines and substations. Under
US GAAP, the direct and indirect financial costs of developing long-lived
assets are capitalized until the assets are deemed to have reached an
operating stage so that the interest costs form part of the historical costs
of these assets. Therefore, an adjustment has been included in the
reconciliation to US GAAP under paragraph 1 m) below. This adjustment for the
Transmission Business is not applicable to HQI Transelec as it is considered
in the acquisition adjustments described in paragraph 1 f) below.
For purposes of US GAAP, additional interest of ThCh$ 574,560, ThCh$
27,448 and ThCh$ 145,222 was capitalized during the year ended December 31,
1999, for the period from January 1, 2000 to October 22, 2000, and for the
year ended December 31, 2001, respectively. Depreciation of capitalized
interest amounted to ThCh$ 42,332, ThCh$ 106,695, and ThCh$ -, respectively,
during the same periods. During the period from October 23, 2000 to
December 31, 2000 there were no projects that met the requirements for
capitalization of interest under US GAAP.
d) TRANSMISSION BUSINESS - INTANGIBLE ASSETS
Under Chilean GAAP, the Transmission Business recorded intangible assets
relating to the contribution of assets from Endesa for shares on May 14, 1998
as disclosed in Note 18 c). Such intangible assets had not been amortized, as
the amortization of intangible assets was optional under Chilean GAAP prior
to 1998. Under US GAAP, intangible assets are amortized from the date of
acquisition over a period not to exceed 40 years based on the expected period
of future benefit. For US GAAP purposes, such intangible assets were fully
amortized and valued at zero. The difference in accounting for the intangible
assets between Chilean and US GAAP is included in the reconciliation to
US GAAP under paragraph 1 m) below. This adjustment for the Transmission
Business is not applicable to HQI Transelec as it is considered in the
acquisition adjustments described in paragraph 1 f) below.
e) STAFF SEVERANCE INDEMNITY
As described in Note 3 n) for Chilean GAAP purposes, the Company
recorded an obligation for severance indemnities when rights to such benefits
were formally granted to employee groups. Those obligations were based on the
present value of the liability determined at the end of each year based on
current salary and the average estimated service life of each employee. The
Company used a real discount rate of 6.5% (6.5% for 2000 and 9.5% for 1999),
a projected average employee service period of 35 years for vested employees
and 75% of the benefit for non-vested employees. The real annual discount
rate does not include a projection of inflation and, accordingly, future
salary increases are also excluded from the calculation of the obligation
because all such future increases are expected to approximate the increase in
inflation over a long-term period. For US GAAP purposes, the severance
indemnities described above should be determined based on the vested benefits
to which the employees are entitled if they leave immediately (settlement
basis). The difference in accounting for staff severance indemnities between
Chilean and US GAAP is included in the reconciliation to US GAAP under
paragraph 1 m) below.
F-41
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
f) ACQUISITION OF THE TRANSMISSION BUSINESS
Under Chilean GAAP, the excess of the cost over the net book value of an
acquired company is recorded as goodwill, which is then amortized over a maximum
period of 20 years. Moreover, under Chilean GAAP the legal form of transactions
among group companies is recorded in the amounts of each company in accordance
with contractual terms.
Under US GAAP, the cost of an acquisition should be assigned to the
tangible and identified intangible assets acquired and liabilities assumed on
the basis of their fair values at the date of acquisition. An excess of the cost
over fair value of net assets acquired should be recorded as goodwill, and
amortized over a period not exceeding 40 years based on the expected period of
future benefit. Moreover when a purchase transaction results in a company
becoming substantially wholly-owned, establishing a new basis of accounting, US
GAAP requires that the accounting basis of the assets and liabilities acquired
be the same regardless of whether the company continues to exist or is merged
into other operations. Accordingly, the purchase cost assigned to the assets
acquired and liabilities assumed must be "pushed down" into the separate
financial statements of the acquired company.
The accounting for the acquisition of the Transmission Business in
accordance with Chilean GAAP is described in Note 2. The acquisition accounting
under US GAAP was as follows:
<Table>
<Caption>
ThCh$
-----------
Purchase cost of Transmission Business under Chilean GAAP 640,013,140
Push-down of additional transaction costs from HQ 1,228,898
Opening equity balance difference (Note 2) 1,998,404
-----------
Purchase cost of Transmission Business under US GAAP 643,240,442
===========
</table>
The adjustment to reflect the push-down of additional costs incurred by HQ
for US GAAP purposes is shown in paragraph 1 m) below.
F-42
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
The goodwill calculated under US GAAP and the adjustment required to the
goodwill recorded pursuant to Chilean GAAP was as follows:
<Table>
<Caption>
ThCh$
------------
Purchase cost of Transmission Business under US GAAP 643,240,442
Fair value of assets acquired and liabilities assumed (599,395,816)
Transfer to deferred income taxes (Note 11) (20,861,770)
------------
Goodwill under US GAAP 22,982,856
Goodwill under Chilean GAAP (Note 11) 105,575,874
------------
Difference 82,593,018
============
</Table>
The goodwill for US GAAP is amortized over 35 years as compared to 20 years
for Chilean GAAP. The differences between goodwill and the related amortization
under Chilean and US GAAP is shown in paragraph 1 m) below.
The remaining difference between Chilean GAAP and US GAAP relates to the
valuation of assets acquired and liabilities assumed. The primary difference
between net book value of the assets recorded under Chilean GAAP and their fair
values assigned under US GAAP relates to property, plant and equipment. The
differences between using net book value and/or acquisition cost for Chilean
GAAP purposes and fair value for US GAAP purposes on depreciation expense and
accumulated depreciation are shown in paragraph 1 m) below.
Consistent with the change in useful lives of some assets included in
property, plant and equipment under Chilean GAAP described in Note 4), the
Company has also modified the useful lives of the aforementioned assets under US
GAAP. The effect of the change resulted in a decrease in the charge to income
under US GAAP for depreciation during 2001 of approximately ThCh$ 9,510,000.
g) DEFERRED INCOME TAXES
Under Chilean GAAP, as discussed in Note 4, effective January 1, 2000 the
Transmission Business began applying Technical Bulletin No. 60 of the Chilean
Institute of Accountants concerning deferred income taxes. Technical Bulletin
No. 60 requires the recognition of deferred income taxes for all temporary
differences, whether recurring or not, using the asset and liability approach.
For US GAAP purposes, in years prior to January 1, 2000, the Company applied
SFAS No. 109, "Accounting for Income Taxes" whereby income taxes are also
recognized using substantially the same asset and liability approach, with
deferred income tax assets and liabilities established for temporary differences
between the financial reporting basis and tax basis of the Company's assets and
liabilities at enacted rates expected to be in effect when such amounts will be
realized. Deferred tax assets must be reduced by a valuation allowance when it
is more likely than not such assets will not be realized. After the year ended
December 31, 1999, Chilean GAAP and US GAAP differ due to the recognition for US
GAAP purposes of the reversal of deferred income tax assets and liabilities
previously included in the US GAAP reconciliation in prior years.
F-43
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
Prior to the implementation of Technical Bulletin No. 60, no deferred
income taxes were recorded under Chilean GAAP if the related timing differences
were expected to be offset in the year that they were projected to reverse by
new timing differences of a similar nature.
The effects of differences in deferred income taxes between Chilean GAAP
and US GAAP are included in paragraph 1 m) below and certain additional
disclosures required under SFAS No. 109 are set forth under paragraph 2 a)
below.
h) MINIMUM DIVIDEND
As required by the Chilean Companies Act, unless otherwise decided by the
unanimous vote of the holders of issued and subscribed shares, HQI Transelec
must distribute a cash dividend in an amount equal to at least 30% of its income
as determined in accordance with Chilean GAAP, unless and except to the extent
that HQI Transelec has unabsorbed prior year losses. Since the payment of the
30% dividend out of each year's income is required by Chilean law, an accrued
liability of ThCh$ 983,178 for the period from October 23, 2000 to December 31,
2000 was included in the US GAAP reconciliation in paragraph 1 m) below. As the
Company had losses for the year ended December 31, 2001, no dividend accrual for
the aforementioned year is required.
i) COMPREHENSIVE INCOME
SFAS No. 130 "Reporting Comprehensive Income" establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The objective of the statement is to
report all changes in shareholder's equity that result from transactions and
other economic events of the period other than transactions with owners
("comprehensive income"). Comprehensive income is the total net income and other
non-owner equity transactions that result in changes in net equity.
Comprehensive income is equivalent to net income as determined under US GAAP as
the Company has no components of other comprehensive income in all periods
presented.
j) DERIVATIVES
In June 1998 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). In June 1999
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities Deferral of the Effective Date of FASB Statement No. 133" which
delayed the effective date of SFAS No. 133 to January 1, 2001 for calendar year
companies such as the Company. In June 2000 the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
An Amendment of FASB Statement No. 133," which amended certain provisions of
SFAS No. 133. These standards require an entity to recognize all derivatives as
either assets or liabilities in the balance sheet and to measure those
instruments at fair value. The Company's use of derivative instruments and
hedging activities is designed to reduce exposure to the risk associated with
fluctuations in exchange rates with respect to exchange positions in US dollar
denominated assets and liabilities. Therefore, the accounting required by SFAS
No.133 is not significantly different from the accounting the Company presently
uses for these derivatives when they are in a net loss position (described in
Note 3 q).
F-44
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
k) ADVANCES TO AND RECEIVABLES FROM SHAREHOLDERS
As described in Note 20 a), at December 31, 2001 the Company recorded a
receivable balance from Inversiones HQI Chile (the parent company) that will be
paid by dividends received from the Company. Under Chilean GAAP, advances to and
receivables from shareholders are treated as assets and are recorded in
accordance with contractual terms. Under US GAAP, advances to and receivables
from shareholders generally should be reflected as a reduction of equity. The
difference in accounting for advances to and receivables from shareholders
between Chilean GAAP and US GAAP is included in the reconciliation to US GAAP
under paragraph 1 m) below.
l) DEBT DISCOUNT AND ISSUE COST
Under Chilean GAAP, deferred debt discount and debt issue cost is reported
as an asset and amortized to interest expense by straight-line methods. As
described in Note 15, during 2001 the Company issued bonds in UF and US dollars
and recorded the respective debt discount (Note 9) and debt issue cost (Note 23)
in Other assets net of amortization. Under US GAAP, debt discount and debt issue
cost are deducted directly from the liability and amortized using the effective
interest or discount rate implicit in the borrowing transaction. Management
believes that the effects of the difference in amortization methods is not
material to the Company's results of operations.
m) EFFECTS OF CONFORMING TO US GAAP
The adjustments to reported net income required to conform to US GAAP were
as follows:
TRANSMISSION BUSINESS HQI TRANSELEC
------------------------------- -------------------------------------
FOR THE YEAR FOR THE YEAR
ENDED FOR THE PERIODS FROM ENDED
------------- --------------------------------- -------------
DEC. 31, 1999 JAN. 1, 2000 TO OCT. 23, 2000 TO DEC. 31, 2001
OCT. 22, 2000 DEC. 31, 2000
------------- --------------- ---------------- -------------
(CONSOLIDATED)
ThCh$ ThCh$ ThCh$ ThCh$
Net income as shown in the Chilean GAAP
financial statements 16,799,303 15,997,221 3,277,260 (5,189,210)
Reversal of additional depreciation on revaluation
increment of property, plant and equipment (b) 983,048 808,170 - -
Capitalization of interest (c) 532,228 (79,247) - 145,222
Intangible assets (d) 282,736 236,344 - -
Staff severance indemnities (e) 1,391,427 (654,712) 29,850 149,281
Amortization of goodwill (f) - - 1,010,558 4,782,594
Additional depreciation expense (f) - - (2,193,945) (1,318,170)
Adjustments for deferred income taxes (g) (933,073) (740,663) 320,774 86,881
Deferred income tax effect of US GAAP
adjustments (g) (86,183) 657,199 (134,853) (256,328)
------------ ----------- ---------- ----------
Net income under US GAAP 18,969,486 16,224,312 2,309,644 (1,599,730)
============ =========== ========== ==========
F-45
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
The adjustments required to conform shareholders' equity amounts to US GAAP
were as follows:
TRANSMISSION
BUSINESS HQI TRANSELEC
------------ -------------------------------
AT DECEMBER 31,
---------------------------------------------
1999 2000 2001
------------- ------------- -------------
(CONSOLIDATED)
ThCh$ ThCh$ ThCh$
Shareholder's equity as shown in the Chilean GAAP
financial statements 193,880,753 323,032,086 317,842,876
Reversal of revaluation of property,
plant and equipment (b) (21,273,394) - -
Capitalization of interest (c) 1,712,000 - 145,222
Intangible assets (d) (11,097,320) - -
Staff severance indemnities (e) (229,236) 29,850 179,131
Push-down of acquisition expenses (f) - 1,228,898 1,228,898
Goodwill (f) - 1,010,558 5,793,152
Accumulated depreciation (f) - (2,193,945) (3,512,115)
Deferred income taxes (g) (1,548,703) 320,774 407,655
Deferred income tax effect of US GAAP
adjustments (g) (222,416) (134,853) (391,181)
Minimum dividend (h) - (983,178) (983,178)
Loan to Inversiones HQI Chile Holding Ltda. (k) - (75,208,799)
------------- ------------- -------------
Shareholders' equity in accordance with US GAAP 161,221,684 322,310,190 245,501,661
============= ============= =============
F-46
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
The changes in net equity accounts under US GAAP were as follows:
ThCh$
-----------
TRANSMISSION BUSINESS
Balance at January 1, 1999 163,211,928
Distribution of dividends (20,959,730)
Net income for the year 18,969,486
-----------
Balance at December 31, 1999 161,221,684
Distribution of dividends (13,845,554)
Net income for the period 16,224,312
-----------
Balance at October 22, 2000 163,600,442
===========
HQI TRANSELEC
Balance at October 23, 2000 319,722,914
Capital contribution 31,912
Additional paid-in capital for push-down of acquisition expenses 1,228,898
Minimum dividend (983,178)
Net income for the period 2,309,644
-----------
Balance at December 31, 2000 322,310,190
Loan to Inversiones HQI Chile Holding Ltda. (75,208,799)
Net income for the period (1,599,730)
-----------
Balance at December 31, 2001 245,501,661
===========
n) BALANCE SHEET AND INCOME STATEMENT CLASSIFICATION UNDER US GAAP
As described in Note 25 l), under Chilean GAAP, the Company has
classified deferred debt discount and debt issue cost as an asset. Under US
GAAP, the debt discount and issue cost is deducted directly from the
liability. Consequently, under US GAAP, ThCh$ 1,644,825 and ThCh$ 11,899,053
should be reclassified from Other current assets and Other long-term assets,
respectively, and deducted from Long-term bonds payable at December 31, 2001.
As disclosed in Notes 21 and 22, under Chilean GAAP, the Company has
classified certain items in non-operating results (i.e. settlement of
arbitration relating to transmission tariffs, certain gains and losses on
sales of property, plant and equipment, allowances for impairment of
property, plant and equipment, obsolescence of inventory, etc.) that under
US GAAP are included in operating income. Consequently, under US GAAP,
ThCh$ (1,202,785), ThCh$ 2,035,948, ThCh$ (105,588) and ThCh$ (594,767) should
be reclassified from non-operating income (expenses) for the year ended
December 31, 1999, for the periods from January 1, 2000 to October 22, 2000
and from October 23, 2000 to December 31, 2000, and for the year ended
December 31, 2001, respectively.
F-47
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
2) ADDITIONAL DISCLOSURE REQUIREMENTS
a) INCOME TAXES
The provisions for income taxes charged to the results of operations were as
follows:
TRANSMISSION BUSINESS HQI TRANSELEC
------------------------------- -------------------------------------
FOR THE YEAR FOR THE YEAR
ENDED FOR THE PERIODS FROM ENDED
------------- --------------------------------- -------------
DEC. 31, 1999 JAN. 1, 2000 TO OCT. 23, 2000 TO DEC. 31, 2001
OCT. 22, 2000 DEC. 31, 2000
------------- --------------- ---------------- -------------
(CONSOLIDATED)
ThCh$ ThCh$ ThCh$ ThCh$
Deferred income tax expense
(benefit) under Chilean GAAP - 1,789,646 (244,767) (517,351)
Reclassification under US GAAP - 153,923 - -
Additional deferred income tax
expense (benefit) under US GAAP 1,019,256 83,464 (185,921) 169,447
Current income tax provision 2,501,663 985,574 944,314 14,331
Other charges (Note 17 a) - - - 1,248,349
------------- --------------- ---------------- -------------
3,520,919 3,012,607 513,626 914,776
============= =============== ================ =============
Deferred income tax assets (liabilities) were as follows:
HQI TRANSELEC
AT DECEMBER 31, 2000
(CONSOLIDATED)
---------------------------------------------------------
SFAS 109 SFAS 109 TOTAL
APPLIED TO APPLIED TO DEFERRED
CHILEAN GAAP US GAAP TAXES UNDER
BALANCES ADJUSTMENTS SFAS 109
-------------- ---------------- -------------------
ThCh$ ThCh$ ThCh$
Deferred income tax assets:
Accrued employee vacations 63,308 - 63,308
Other accruals 340,988 - 340,988
-------------- ---------------- -------------------
Total deferred income tax assets 404,296 - 404,296
============== ================ ===================
Deferred income tax liabilities:
Accrued staff severance indemnities (124,653) 124,652 -
Property, plant and equipment (1,824,523) (18,965,973) (20,790,496)
-------------- ---------------- -------------------
Total deferred income tax liabilities (1,949,176) (18,841,321) (20,790,496)
-------------- ---------------- -------------------
Net deferred income tax liabilities (1,544,880) (18,841,321) (20,386,200)
============== ================ ===================
F-48
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
HQI TRANSELEC
AT DECEMBER 31, 2001
(CONSOLIDATED)
---------------------------------------------------------
SFAS 109 SFAS 109 TOTAL
APPLIED TO APPLIED TO DEFERRED
CHILEAN GAAP US GAAP TAXES UNDER
BALANCES ADJUSTMENTS SFAS 109
-------------- ---------------- -------------------
ThCh$ ThCh$ ThCh$
Deferred income tax assets:
Accrued employee vacations 62,279 - 62,279
Other events 22,753 - 22,753
Swap and forward contracts 803,169 - 803,169
Tax loss carry-forward 2,736,270 - 2,736,270
Property, plant and equipment 17,857,239 (19,131,068) (1,273,829)
-------------- ---------------- -------------------
Total deferred income tax assets 21,481,710 (19,131,068) 2,350,642
============== ================ ===================
Deferred income tax liabilities:
Prepaid expenses 1,527,158 - 1,527,158
Accrued staff severance indemnities 119,819 (119,819) -
-------------- ---------------- -------------------
Total deferred income tax liabilities 1,646,977 (119,819) 1,527,158
-------------- ---------------- -------------------
Net deferred income tax assets 19,834,733 (19,011,249) 823,484
============== ================ ===================
The provision for income taxes differs from the amount of income tax
determined by applying the applicable Chilean statutory income tax rate (15%)
to US GAAP pretax income as a result of the following differences:
TRANSMISSION BUSINESS HQI TRANSELEC
------------------------------- -----------------------------------
FOR THE YEAR FOR THE YEAR
ENDED FOR THE PERIODS FROM ENDED
------------- --------------------------------- -------------
DEC. 31, 1999 JAN. 1, 2000 TO OCT. 23, 2000 TO DEC. 31, 2001
OCT. 22, 2000 DEC. 31, 2000
------------- --------------- ---------------- -------------
ThCh$ ThCh$ ThCh$ ThCh$
US GAAP pretax income 22,490,404 19,236,919 2,823,270 (684,954)
At statutory rates 3,373,561 2,885,538 423,490 (102,743)
Increase (decrease) in rates resulting from:
Price-level restatement not accepted
for tax purposes 47,890 107,015 56,465 4,452
Non-deductible expenses 293,816 20,050 13,439 7,346
Adjustments of prior year taxes - 153,923 - -
Amortization of goodwill - - 29,890 98,111
Other charges (Note 17 a) - - - 1,248,349
Non-taxable income (194,348) (153,919) (9,658) (243,860)
Increase in Chilean tax
rates (effect on deferred taxes) - - - (96,879)
------------- --------------- ---------------- -------------
At effective tax rates 3,520,919 3,012,607 513,626 914,776
============= =============== ================ =============
F-49
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
b) DISCLOSURES ABOUT FAIR VALUE
The carrying value of the Company's financial instruments, including cash, time
deposits, marketable securities, short-term bank loans and short-term
intercompany debt, approximate fair value due to their short-term maturities.
The fair value of swap and forward contracts is equivalent to the Company's
carrying value, which is fair value.
The fair value of the Company's bonds payable, estimated using quoted market
prices at year end, are as follows:
DECEMBER 31, 2001
CARRYING FAIR
AMOUNTS (1) VALUE
------------- --------------
Bonds payable - UF 147,223,986 146,209,770
Bonds payable - US$ 301,644,401 314,427,670
------------- --------------
448,868,387 460,637,440
============= ==============
(1) Current and Long-term Bonds payable net of deferred discount and issue
costs.
c) CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable.
The Company maintains cash and cash equivalents with various major
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these financial institutions and limits the amount
of credit exposure with any institution.
With respect to accounts receivable, 100% of the Company's net sales in
1999, 2000 and in 2001 were to customers located in Chile. The majority of the
Company's net sales, ThCh$ 67,211,674, ThCh$ 55,250,248, ThCh$ 15,318,015 and
ThCh$ 75,025,791 for the year ended December 31, 1999, for the periods from
January 1, 2000 to October 22, 2000 and October 23, 2000 to December 31, 2000,
and for the year ended December 31, 2001, respectively, were generated through
tolls and transmission charges to Endesa and its subsidiaries, the largest
electricity generator selling into the SIC. The remaining sales were
attributable to Colbun and Gener.
F-50
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
d) PRO FORMA CONDENSED INCOME STATEMENT
APB No. 16 "Business Combination", requires the disclosure of certain pro
forma information concerning the results of operations of the Company as if its
acquisition of the Transmission Business occurred on January 1, 1999.
The following unaudited pro forma information has been prepared for
comparative purposes only and does not purport to be indicative of the results
of operations that actually would have resulted had the acquisition occurred on
the date indicated, or which may result in the future:
1999 2000
------------ ------------
(UNAUDITED)
Net sales 84,511,069 86,095,491
Chilean GAAP net income (loss) (11,970,690) 6,356,824
US GAAP net loss (16,017,539) (1,890,131)
e) ACCOUNTING FOR REGULATED ENTERPRISES
The electricity sector in Chile is regulated pursuant to the Chilean
Electric Law. Although certain of the Company's net sales are subject to
regulations designed to ensure and adequate supply of energy at reasonably
determined prices considering a variety of factors, the pricing model is not
solely based upon costs incurred. Accordingly, SFAS 71 related to a business
whose rated are regulated is not applicable to the Company's financial
statements.
f) SEGMENT INFORMATION
The Company operates in a single operating segment within the electricity
transmission industry in Chile. Management uses one measurement of profitability
for purposes of making operating decisions and assessing financial performance
and does not disaggregate its business for internal reporting.
The Company's headquarters and operations are located in Chile. All sales
are made to customers in Chile.
F-51
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
Net sales consisted of tolls and transmission charges and other services as
follows:
TRANSMISSION BUSINESS HQI TRANSELEC
------------------------------- -------------------------------------
FOR THE YEAR FOR THE YEAR
ENDED FOR THE PERIODS FROM ENDED
------------- --------------------------------- -------------
DEC. 31, 1999 JAN. 1, 2000 TO OCT. 23, 2000 TO DEC. 31, 2001
OCT. 22, 2000 DEC. 31, 2000
------------- --------------- ---------------- -------------
(CONSOLIDATED)
ThCh$ ThCh$ ThCh$ ThCh$
Tolls and transmission charges 75,941,295 66,331,710 16,865,789 88,249,018
Other services (1) 8,569,774 2,255,179 642,813 1,709,962
------------- --------------- ---------------- -------------
Total 84,511,069 68,586,889 17,508,602 89,958,980
============= =============== ================ =============
(1) Other services primarily consist of consulting and transmission asset
operating and maintenance fees.
g) OTHER DISCLOSURES
The Company has accounted for the liability for severance indemnities as
disclosed in Note 3 n). Except for severance indemnities, the Company does not
provide any postemployment or postretirement benefits to its employees and,
accordingly, there is no need to record any additional obligations in accordance
with either SFAS 106 ("Employer's Accounting for Retirement Benefits other than
Pensions") or SFAS 112 ("Employer's Accounting for Postretirement Benefits").
h) ACCOUNTING DEVELOPMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations". SFAS, No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001; the use of the pooling-of-interests method of accounting is prohibited
after this date. SFAS No. 141 also establishes specific criteria for the
recognition of intangible assets separately from goodwill and it requires
unallocated negative goodwill to be written off immediately as an extraordinary
gain (instead of being deferred and amortized). The Company did not complete any
acquisitions between July 1, 2001 and December 31, 2001. Accordingly adoption of
SFAS No. 14 had no impact on the US GAAP results at December 31, 2001.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No.142 eliminates the amortization of goodwill and instead
requires a periodic review of any goodwill balance for possible impairment. SFAS
No. 142 also requires that goodwill be allocated at the reporting unit level.
SFAS No. 142 is effective for years beginning after December 15, 2001. The
Company has not yet completed the transitional impairment test required by SFAS
No. 142 as of January 1, 2002. The Company is evaluating the effect of this
statement on its financial position and results of operations.
F-52
HQI TRANSELEC CHILE S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RESTATED FOR GENERAL PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF
CONSTANT CHILEAN PESOS OF DECEMBER 31, 2001
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes the
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, the entity either settles the obligation for the
amount recorded or incurs a gain or loss. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. The Company is evaluating the effect of
this statement on its financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Disposal of Long-Lived Assets". SFAS No. 144 supersedes FASB
statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" for the disposal of
a segment of a business (as previously defined in APB No. 30). The FASB issued
SFAS No. 144 to establish a single accounting model, based on the framework
established in SFAS No. 121, for long-lived assets to be disposed of by sale.
SFAS No. 144 broadens the presentation of discontinued operations in the income
statement to include a component of an entity (rather than a segment of a
business). A component of an entity comprises operations and cash flows that can
be clearly distinguished, operationally and for financial reporting purposes,
from the rest of the entity. SFAS No. 144 also requires that discontinued
operations be measured at the lower of the carrying amount or fair value less
cost to sell. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001 and should be applied prospectively. The Company is evaluating
the effect of this statement on its financial position and results of
operations.
F-53