UPDATE 1-PSEG to sell Chile and Peru power company stakes

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NEW YORK, Oct 31 (Reuters) - Public Service Enterprise Group Inc (PEG.N) said on Wednesday it will sell its interests in a power company in Chile and another in Peru to AEI for $685 million.

AEI, formerly Ashmore Energy International, has agreed to buy PSEG's 50 percent interest in Chile's Chilquinta Energia SA ENQ.SN, and 38 percent interest in Luz del Sur SA (LUZ.LM) in Peru.

Including debt, the transaction is valued at $885 million, with after-tax net cash proceeds expected to total between $480 million to $500 million. The deal is expected to close by the year-end, PSEG said.

New Jersey-based PSEG said the sale of these Latin American assets will lower future earnings per share by up to 10 cents a year.

After the transaction, PSEG will retain a smaller Latin American portfolio, including assets in Venezuela and the SAESA group, an integrated electric utility in Chile, according to Wachovia Capital Markets.

"We believe these will also ultimately be sold," said Samuel Brothwell, an analyst at Wachovia Capital Markets, in a research note.

Chilquinta is the fourth-largest distributor of electricity in Chile, serving more than 570,000 customers. Luz del Sur is one of the largest companies in Peru and distributes electricity to about 800,000 customers. (Reporting by Lisa Lee; additional reporting by Ankur Relia in Bangalore))