Friday October 07, 2011
by Nathan Slaughter, editor Street Authority Market Advisor
Empresa Nacional de Electricidad (EOC) -- or Endesa Chile --is one of Latin America's leading power providers; it is responsible for 35% of the electric generating capacity in Chile, arguably the most stable country in the region.
It also has sizeable market shares in Argentina, Colombia, Brazil and Peru. Some one-third of its electricity flows to local and regional distributors under regulated contracts that throw off reliable (and inflation-indexed) cash flows.
As with any other commodity, the biggest gains among power producers accrue to those with the lowest costs.
Nearly two-thirds of Endesa Chile's electricity is generated by hydroelectric plants, which don't require ongoing fuel expenses.
This reliance does leave the company susceptible to drought, forcing it to buy energy to satisfy contracts when water runs low. But typically hydroelectricity means lower costs and wider profit margins.
In the U.S. and much of Europe, power consumption is inching along at a slow pace. But booming economic prosperity in Brazil, Chile and other markets is putting more disposable income in the hands of the middle class.
The company has poured $300 million in substations and distribution lines to carry electricity to remote areas of Peru that were without power just a few years ago.
The company is currently embarking on its most ambitious project yet, the $7 billion HidroAysen hydroelectric plant that could boost generating capacity by 2,750 megawatts.
This investment-grade power generator has an attractive mix of operations. Much of its income is generated by long-term contracts that are fixed, secure, and built to ratchet higher each year with inflation. Meanwhile, unregulated sales provide some upside growth potential.
That combination has enabled the company to boost its dividend distributions at a superior compounded annual growth rate of 25% over the past five years.
With Empresa Nacional de Electricidad pulling back to a 52-week low below $42 recently, I consider this area to be a prime entry point.
Learn more about this financial newsletter at Nathan Slaughter's Street Authority Market Advisor.