Duke Energy awaits payoff from Latin America gamble

18 May 2004 – When Duke Energy Corp. decided early this year to sell most of its assets outside North America, it left just one area intact: Latin America.

With its business units at home facing limited growth prospects, Duke wanted to hold onto an area with attractive growth potential.

But for analysts who follow the Charlotte company, it was a curious decision, given Duke’s goal of getting out of its riskier ventures.

Latin America economies are growing again, but the region is still considered one of the riskiest places on earth for foreign utilities. After decades of civil strife, some countries remain politically volatile. And the region’s fluctuating currencies can quickly eat away dollar-based profits.

Despite those and other challenges, Duke is undeterred. The company believes its power plants in the region, stretching from Guatemala through Brazil to Argentina, will increase profits as the region’s economies grow. In fact, Duke believes profits from its Latin American operations could grow between two and three per cent annually over the next three years.

“Latin America is such a big place it’s got a lot of potential,” said Duke Chief Financial Officer David Hauser.

Growing economies in the region mean more businesses need electricity to power factories and more residential customers are switching to electric stoves from wood burning. At the same time, Duke is cutting the cost of running the plants, many of which used to be run inefficiently by their federal governments.

“We anxiously await the exit from Latin America of all US utilities,” said David Schanzer, an analyst with Janney Montgomery Scott in Philadelphia.

So what makes Duke think it can succeed? Richard McGee, the president of Duke Energy International and the man in charge of his company’s Latin American operations, said Duke enjoys advantages in Latin America that other US companies do not.

One advantage that Duke has is the size of its portfolio.

Duke’s eight power stations – some owned in conjunction with other utilities – stretch across seven countries from Central to South America. That helps Duke spread out its risk, McGee said. When Duke assets in one country are underperforming, its power plants in another might be doing well.

The plants in those seven countries also run on a variety of fuels, which also spreads risk.

Some are hydroelectric dams, which turn falling water into electricity; others require oil or diesel fuel. When oil is expensive, Duke’s hydro dams will be comparatively cheaper to operate.

Duke also has protected itself somewhat from what some say is the biggest challenge of all: currency fluctuations.

Because of underdeveloped financial markets in Latin America, many US utilities had to use dollars to build or buy plants. So when the Brazilian real drops in value compared with the dollar, so too does the plants’ value.

But its Latin American operations may be shaping into a key unit for Duke’s future. They earned $210 m before interest and tax payments last year, the third-highest of all Duke units, behind Duke Power and its North American natural gas pipelines.