Stormy Weather.

Chilean company Gener fights the elements to provide profitable power.

BETWEEN LATE 1998 AND THE MIDDLE of 1999, Chile baked in its worst drought since 1968. With no water to drive hydroelectric plants, many of the country's power companies shut down. Not Gener, whose juice comes mainly from thermal energy; the Chilean concern filled its supply contracts as well as those of its competitors. "Gener does well in extreme weather conditions," says Andrew Campbell, an analyst at brokerage SG Cowen.

After a sizzling 12-month performance through June 1999--sales increased by almost a third to US$757 million and profits almost doubled to $104 million--temperate weather has returned, dousing the company's third-quarter performance. Profits slid into losses and the soul searching has begun for what CEO Juan Antonio Guzman calls the need to find a thermo/hydro equilibrium and reexamine its sales strategy.

A case in point is Gener's Colombian affiliate Chivor, a 1,000-megawatt hydroelectric plant purchased in late 1996. The El Nina/La Nina weather phenomena led to water surpluses in the country's hydroelectric facilities and spot market prices consequently bombed, particularly bad news for Gener as Chivor has only 40% of generation under contract, leaving the remaining 60% open to spot market deviations. Temperate weather blues. In addition to the water surpluses, Gener's Colombian operation faces regulatory disputes and a contracting economy that has shrunk demand considerably Guzman says. Spot market sales in Colombia fell 66%, the third straight quarterly fall.

Meanwhile, in Chile, heavy rains and snowfall washed away the drought and Gener was caught in a no-man's land of intermediate weather. In wet weather, the company can buy cheap hydroelectric power to supply its contracts at below thermoelectricity's generation cost, while in dry weather it can supply thermo power to its hydro competitors. Unfortunately, the third quarter was neither and results dipped back into the red at $17.4 million.

So how can the company insulate itself against the weather? Guzman says, beyond the thermo/hydro equilibrium, the company needs to look at its sales strategy.

During the drought, for example, Gener's generation subsidiary Sociedad Electrica Santiago (Essa) cashed in with high sales volumes when spot market prices on the central interconnected grid were high. But in the much larger wholesale market, the prices at which generators sell to distributors didn't reflect generators' efforts to ensure supply during the drought. Instead, the prices fell. Says Guzman: "Something is definitely wrong."

While the firm lobbies for a better pricing environment in Chile, it is also aggressively seeking contracts to stabilize results in Colombia.

Time is of the essence, because large competitors are entering Gener's markets. Spain's Endesa has purchased a majority share in local energy holding Enersis, which controls Gener's principal rival. Thwarted in its own bid for Enersis, Duke Energy has started buying assets left and right, including a shareholding swap with Gener for its approximate 30% stake in a Peruvian generator in return for cash and Duke's 24% stake in Essa.

"It's smart to be consolidating," SG Cowen's Campbell says. "The moves that they are making are logical."

Apart from concentrating ownership of the solidly performing Chilean subsidiary, Gener is rapidly expanding its international operations. It has doubled its stake to 64% in Argentine thermoelectric generator Central Puerto. In May 1999, Gener teamed with U.S.-based Coastal to buy a 50% stake in 600-megawatt thermoelectric generator Itabo in the Dominican Republic, and pledged to expand capacity, possibly with the use of coal from Gener's Colombian mines. Guzman foresees further expansion in South America, where he is determined to be "an important player."

Gener participates in the electricity business in Chile (generation and transmission), Argentina (generation, transmission and distribution), Colombia and Peru (generation), and the United States (energy trading). A key area is its Argentina operations with connections to Brazil. In the first half of 2000, Central Puerto's new 769-megawatt generator will begin operation in Buenos Aires as will a 631-megawatt Termo Andes in the northern Argentine province of Salta. The company is studying the possibility of exporting energy to southern Brazil A move analyst Jason Todd, of Duff & Phelps Credit Rating Co., says makes sense as the "energy sectors will likely become integrated in the future."

The main question is whether Gener will be able to take part in that trend independently or will eventually be bought by a bigger concern. While the rumor mill has been rampant, Guzman wouldn't comment about any takeover talk. He says money is not a problem for his company's expansion right now. "We don't have any financing plans," he says. "We don't need any either."