On the spot: Endesa Chile sees a bright future in energy demand both at home and abroad.

Power company Endesa Chile has cleaned up its books; energy demand is rising; and one of its major markets, Argentina, has hit rock-bottom so hard it seems that things can only improve. The largest electric energy generator in Chile and one of the largest in Latin America is breathing a bit easier in 2004.

Endesa was able to weather problems in Argentina and Brazil in early 2003 and, along with its majority owner Enersis, to significantly reduce US$1.5 billion in debt that had spooked investors. Endesa Chile reduced debt by $340 million in dollar terms in 2003, while also improving its balance sheet by selling off some units. It also successfully issued two new bonds.

Jaime Montero, investor relations director for Endesa Chile, says the company benefited in part from rising energy use across the region. "In 2003, energy demand grew 8% in Argentina, 6.6% in Brazil, 6.6% in Chile, 3.4% in Colombia, and 5.6% in Peril," Montero says. "So, in all of the countries where we are involved, there was a strong increase in demand. And there's no reason to believe that the strong growth won't continue."

In 2003, the electricity company's total sales were $1.55 billion, down 2.9% from $1.60 billion the year before. Endesa's saw net income of $131.6 million in 2003, compared to a $15.9 million loss in 2002. Operating income for Endesa's Chilean business fell 10% last year, while foreign units saw mixed results, improving in Colombia by 12.9% and Argentina by 154%. As the Chilean peso strengthened, however, Brazil income slipped 78.7% and in Peru fell 13.9%. Endesa's assets, liabilities and debt are mostly denominated in dollars.

Although additional exposure to neighboring economies means more risk, Endesa could ride that demand to considerable growth, analysts hole. Energy needs grow at double national economic output. Creating supply will fall to someone, and Endesa seems to be well positioned to meet that market.

While heavily concentrated in Chile, Endesa has properties throughout South America, with Central Hidroelectrica de Betania and Emgesa in Colombia, Edegel in Peru, Centrals Eletricas Cachoeira Dourada in Brazil, and Hidroelectrica EL Chocon and Central Costanera in Argentina.

Yet boosting capacity entails significant risks for Endesa since many variables are out of its hands. Weather, for instance, or Chile's continuing political spat with Argentina over natural gas supplies.

Despite millions spent to interconnect Argentina's gas fields with Chilean demand--particularly in the north, where copper mines depend on cheap energy to compete--a shortage is forcing Argentina to reconsider sending gas to its rival across the Andes. Argentine politicians cast blame on foreign energy companies for failing to invest. Yet as winter begins, Chilean businesses and consumers are being told to wait in line for gas from Argentine pipelines. Some sort of rationing of natural gas--used for cooking and heating--seems inevitable.

Endesa's moves are also highly contingent on whether governments in Brazil and Argentina deliver more favorable regulations, which do not seem imminent. As hard times continue to pressure countries like Argentina and Brazil--despite historically high prices for commodity exports--governments will strive to keep energy prices low.

Roadblocks. Analysts predict that Endesa will concentrate on Chile due to regulatory roadblocks abroad. In Peru and Colombia, for example, the company already has close to the maximum market share allowed by regulators. Endesa's 570-megawatt hydroelectric Ralco plant, scheduled to begin operating in Chile in July 2004, could leave the company with significant overcapacity and force it to sell power on the spot market--lucrative when demand is high but no guarantee of income.

Consequently, Chile's loss is Endesa's gain. The company could benefit from Argentina's restrictions of gas exports to Chile since its own capacity is 70% hydroelectric, with the rest generated by fossil fuels. "We're sellers in the spot market," says Montero. "In all the countries in which we're operating we have a commercial policy to privilege the spot market."