At a time when many of its competitors are unloading assets in Latin America, North Carolina-based Duke Energy is binge buying.

Between July 29 and August 2, the utility announced acquisitions in the region worth around $1.2 billion, beefing up its modest portfolio there by doubling its investment and generating capacity.

Duke’s purchases in Latin America include Dominion Resource’s Latin America portfolio for $405 million, a Brazilian generating company, Paranapanema, for $680 million, and two Salvadoran generating companies for $125 million. And it seems that the utility is determined to continue its buying spree.

While Duke Energy’s recent succession of purchases and the aggregate expenditure may have astonished industry observers-the company even paid a 90% premium for an asset in Brazil-its aggressiveness and interest come as no surprise.

“It has been known for a long time that Duke Energy wanted to get into the region,” said David Hurd, utilities analyst at Deutsche Bank in Brazil.

The company’s eagerness to enter the Latin American energy market with a bang was particularly evident earlier this year in its hard-fought battle with Endesa Spain to gain control of Endesa Chile. In the end, Duke Energy dropped out of the competition, saying Endesa’s $2 billion bid was “beyond what we thought the value of (Enersis) was,” said Peter Wilt, senior vice president for Southern Latin America of Duke Energy International.

While the Endesa loss was, without a doubt, a major setback, it was also what prompted the company to snatch up the string of regional assets in late July and early August, says Nancy Messer, associate director at Standard&Poor’s.

“It’s their plan B for accomplishing the same goal, which is to set their footprint in Latin America,” said Messer.

Wilt says that the Dominion and Paranapanema assets share the geographic diversity of Endesa’s investments outside of Chile and provide an ideal opportunity for the company to rapidly expand and diversify into the region.

Using just half the capital it had reserved for the Endesa purchase, Duke was able to amass a presence in Brazil, Belize, Bolivia, Peru and El Salvador, enhancing a Latin American portfolio that previously only included a small equity participation in Chile and Argentina.

Duke’s tactics-calling off the Endesa bid and waiting patiently for other opportunities-were justified and appropriate, says Deutsche’s Hurd. “The price paid for Endesa Chile was ludicrous,” he said. “It was one of the highest prices paid (for an energy asset) in Latin America ever. I applaud Duke’s attempt, but also as a minority shareholder I would thank God they didn’t buy it because of the price.”

Getting Out
While many bankers, analysts, and industry observers support Duke’s Latin America strategy of expansion and diversification, others question its timing and judgment, especially considering the number of energy companies that are divesting, rather than investing, in the region.

“There are a lot of international companies that have been burned in the first wave,” said Hurd, referring to the phase of investment in the region prompted by earlier privatizations. “They miscalculated the market and overpaid assuming prices would stay high, and prices collapsed.”

US-based Southern Energy is case in point. The Atlanta company-which participated in the region’s first round of privatizations in 1993-is now looking to sell off its interest in a hydroelectric generator in Argentina, the 1000-MW Hidroelectrica Alicura, and a Chilean asset, 466-MW Edelnor.

According to David Mould, spokesman for Southern Energy International, both assets have underperformed financially. “They are not meeting the earning expectations we had envisioned for them originally, and therefore we are looking to sell those assets and refocus on projects with better returns on investment,” said Mould.

The combined write-down for Alicura and Edelnor is $200 million, which will impact the company’s earnings, said Mould.

While other energy companies are shedding their assets in the region-Enersis sold its generation subsidiary, Endesa Chile, and Chilquinta SA this year sold Enerquinta, its electricity distribution asset-industry analysts say such sales shouldn’t concern Duke, specifically.

Tom Smith, president of US energy company PSEG Americas, says strategic sales are simply part of the consolidation goals that naturally follow a period of heavy acquisitions. “Companies are now rethinking their strategies,” said Smith. “They have bits and pieces of companies that are not coherent, and they want to rationalize their holdings.”

Added John Padilla, vice president, global project finance at Dresdner Kleinwort Benson: “When Latin America got hot, there are companies that started to invest all over the place. Now we see more focus in the way they are approaching things,” he said. Deutsche’s Hurd says more of this buying and selling of assets, or “horse swapping,” can be expected, particularly in Brazil. Hurd points to Iberdrola and BVC holdings, which are consolidating their holdings in Brazil.

“In Brazil there are a couple of players that bought all over the country,” he added. “In the next wave, these companies will try to trade horses so they can have greater concentration in a geographical area.”

This seems to be the case with Duke, which has already bought a prize horse in Brazil, the 2,300-MW Paranapanema that serves the populous state of São Paulo. Wilt says Paranapanema is just the beginning.

“Paranapanema is our first step in Brazil,” he said. “We will look at other things over the next three years.”


While acquiring assets in Brazil seems particularly attractive given the country’s growing power demand, the difficulty of completing acquisition financing is a serious concern among institutions.

Padilla of Dresdner, which served as advisor to Duke in the Paranapanema deal, says that although closing the transaction was relatively easy, the acquisition financing will be much more challenging-especially considering the Light and Metroplotana cases, whose bridge loans had to get refinanced at significant premiums.

“The market is not very deep. Bridge loans that don’t have reasonable take-out or partial amortizing are not going to fly” said Padilla. “It is certainly going to boil down to well-financed capitalized transactions.”

Multilateral and bilateral agency support will be more important than ever, as banks continue to shy away from the region, said Padilla. For now, most acquisitions likely will be done through large equity commitments from companies, he said.

This has been the case with Duke, which made its initial purchase of all transactions with internally generated funds, primarily from short-term debt capital. “$1.2 billion is a lot of money unquestionably, but we are a strong, well-capitalized company,” said Duke’s Wilt.

No Sure Thing
While most analysts do not doubt Duke’s ability to perform in the region, Messer says that in today’s volatile environment, anything can happen. “Southern is a strong company, too, but there are missteps and a lot of hazards out there,” she said.

Duke is not without problems of its own. A group composed of Duke Energy, Gener and TransAlta Energy is facing financial difficulties with its Piedra del Aguila asset, a 1,400 MW hydroelectric facility in Argentina. At the end of March, the group defaulted on a $19.8 million interest payment on a $97.1 million loan it holds from Argentina’s Banco Nacion. In addition to tax-reform penalties, the project has suffered from low cash flow and has been unable to meet established requirements, according to Wilt.

While it was reported that TransAlta and Gener were considering divesting their stake in Piedra del Aguila, Wilt says Duke Energy does not intend to call it quits. “We are interested in staying there and are working with our partners to turn the company around.”

Southern’s Mould says projects like Piedra del Aguila and Southern’s own hydroelectric assets in Argentina and Chile have fallen on hard times because of “basic market situations” such as droughts and the increase in natural gas-fired plants, which has in turn depressed spot prices.

“I don’t think we made any errors going in, but there are unforeseen circumstances that can affect a project negatively or positively that are difficult to predict when going into a market early on,” said Mould.

This is why analysts say experience-or lack of-is key for companies in the region.

Duke’s patience in making a major investment in the region, analysts say, may in fact work in its favor. “Duke played it cautious, and this has proven to be well done,” said Hurd.

More to Come
But the company isn’t hesitating anymore. It plans to spend $4 billion to $5 billion in the region over the next five years, says Wilt.

And there is talk that Gener may even be one of Duke’s next targets.

Jane Winslow of Merrill Lynch in Chile says Gener fits in perfectly with Duke’s strategy in the region. For one, Gener’s portfolio would expand Duke’s presence in additional countries, such as Colombia. But the fact that Gener does not have a controlling owner also appeals to Duke, says Winslow, since Duke has particular interest in having a majority share in its assets.

Although Duke has dismissed the rumors about Gener, it, as well as Florida Power&Light, Enron and Entergy have been mentioned as contenders.

Regardless of whether Duke decides to buy Gener, industry analysts say Duke has already made its mark in the region with its purchase of Paranapanema. Messer argues, however, that it’s still too soon to say whether Duke’s strategy in the region will work.

“Only results will tell if the strategy has substance to it,” said Messer. “It sounds good on surface, but a number of things can go wrong.”