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SCIENTECH IssueAlert, November 22, 2000
Endesa Receives Green Light to Move into France
By: Will McNamara, Director, Electric Industry Analysis
===============================================================

Endesa (NYSE: ELE), Spain's largest power utility, has signed an agreement
with Charbonnages de France (CDF) to acquire a 30-percent interest in the
French electricity generator Societe Nationale d'Electricite et de Thermique
(SNET). The transaction has been authorized by the French Government. The
agreement includes Endesa's right to increase its interest in SNET in the
medium term in order to strengthen the cooperation between both companies
and allow Endesa to carry out its industrial development plan in France
and Europe.

ANALYSIS: The approval for Endesa to acquire 30-percent interest in SNET
cements the company's move into France, which is a major component in the
aggressive expansion efforts Endesa has been implementing this year. SNET,
while a comparatively small company by American standards, is still the
second largest electricity company in France in terms of installed capacity,
and third largest in terms of electricity generation. SNET owns five coal
plants totaling 2,600 megawatts, which generate about 6,838 GWh annually.
This is a very low output, and in fact SNET accounts for only 2.5 percent
of the market share in France. However, given the fact that France's largest
energy company, EDF, still has a hold on about 90 percent of the market
in the country, any acquisition of the next-largest company is a major
coup. The acquisition of SNET was also attractive to Endesa because of
the company's experience in coal-based electricity*which still is the power
source for roughly half of the electricity produced across the Continent*and
its progressiveness in terms of technology.

Presently, SNET sells the bulk of its electricity output to EDF under a
long-term contract between the two companies. The rest of its generation
is sold to eligible customers. In addition to its current assets, SNET
is also planning a new 350-MW gas-fired station in eastern France and is
the front runner to build a new clean-coal plant in the heavily industrialized
Rhone Valley. Thus, as France slowly opens its market to competition, SNET
could emerge as one of the major providers. Endesa was able to beat out
other bidders for SNET, including France's Suez Lyonnaise des Eaux and
Germany's RWE, due to the positive valuation of Endesa's industrial and
commercial projects and the economic value of its offer.

Endesa already entered the French market last month with a three-year 
exclusive
agreement to serve the energy needs of SEB, a small appliance company.
The company's move outside of Spain resulted from several factors. First,
the Spanish government has placed restrictions on the domestic growth of
its largest electric companies, essentially land-locking the domestic growth
of companies like Endesa and forcing them to look outward for growth 
opportunities.
In addition, growth in countries like France and Germany is probably appealing
to Endesa because their central location offers additional expansion 
opportunities
into Italy and Eastern Europe. Just within the last year, privatization
has come to the major European countries*either all at once, as in the
case of Germany, or in forced increments, as occurred in France. There
has been little question that Endesa would like to develop generation 
interests
across the Continent, and has taken advantage of competitive opportunities
as they have emerged. In fact, Endesa disclosed that it plans to become
a leading European power player through the swap of assets with other 
electricity
customers and through acquisitions. Rumor has it that Endesa is also looking
to acquire the generation assets of Enel*Italy's state-owned power and
the biggest European rival to EDF.

However, as Endesa expands abroad it continues to face significant problems
in Spain, due mostly to its proposed merger with the second largest 
electricity
provider in the country, Iberdrola. Just last month, Endesa announced that
it had entered into a "friendly merger" with Iberdrola. Together, the two
companies will gain a hold over 80 percent of Spain's power market with
a combined market capitalization of the equivalent to $32 billion. Reportedly,
the merger will create the world's third-biggest electricity company, after
Tokyo Electric Power and Enron. However, Spanish oil company Repsol, which
lost out on the bid for Iberdrola to Endesa, continues to contemplate renewing
a hostile takeover of the company. Repsol claims that it in fact offered
1.2 more euros per share than what Endesa has promised to pay for Iberdrola
in their $13 billion merger, but that Iberdrola did not even consider the
bid. Both Endesa and Repsol are partially owned by the Spanish government
(only 33 percent of Endesa is publicly traded), so presently negotiations
are being held to see if a compromise can be reached. Reportedly, the merger
between Endesa and Iberdrola can occur only if some of the companies belonging
to the merged company are sold, as per the Spanish antimonopoly legislation.
Ironically, this could benefit Repsol as the company plans to invest in
any companies that are divested due to the merger.

France has been criticized by other European nations for delaying energy
liberalization across the Continent. In fact, France has only opened its
power and gas markets by the minimum amount imposed by the European Union.
While other European countries have opened 100 percent of their markets
to competition, France has opted for a phased-in approach, opening a third
each of its power and gas markets by February 2003 and August 2008, 
respectively.
Thus, although Endesa is certainly pushing through barriers to obtain entry
into France, it is questionable when true competition will emerge in the
country. A report from the Paris-based International Energy Agency, issued
just last week, contends that France's power liberalization law restricts
power trading and allows EDF to keep its market advantages.

However, even though Endesa may face expansion limitations in France, it
is important to remember how large the company is in its home country.
Endesa produces about half of Spain's electricity (22,500 MW), relying
mainly on nuclear and coal-fired plants. Looking to diversify, Endesa also
owns interests in gas, water, and telecommunications companies. It is the
largest shareholder in Auna, a jointly owned company (with partners Telecom
Italia and Uni?n Fenosa) that controls Retevisi?n, Spain's second-largest
phone company, behind Telef?nica. In addition, Endesa is also investing
heavily in energy firms in Latin America. Thus, although France is very
important for Endesa's European expansion efforts, the company is still
a contender in other key markets.
===============================================================
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Sincerely,

Will McNamara
Director, Electric Industry Analysis
wmcnamara@scientech.com
===============================================================
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