Argentina’s economic “restoration plans” that include a devaluation of the currency announced last Sunday will impact a number of companies with operations in South America, including Sempra Energy, Duke Energy and other private-sector investors in utility and energy projects in South America’s third largest economy. San Diego-based Sempra with 43% stakes in two Argentine natural gas utilities Monday said it was closely monitoring the situation and assessing to see if the potential impact on future earnings would be enough to warrant a formal announcement.
“First of all, we are not expecting any impact on our 2001 results from Argentina,” a San Diego-based Sempra spokesperson said. “In terms of this year, the results from Argentina represent only a small portion of the corporation’s overall consolidated earnings. We would expect the impact to be minimal.”
Although the spokesperson could not give a precise percentage of earnings, under questioning he indicated it was more than 1%, but could not say how much greater than that. “It is pretty small is all I can say at this point,” the spokesperson said.
As part of its economic stabilization program, the new Argentine government has set the currency exchange at 1.40 pesos to a dollar, a devaluation of 28.5%. The government said it hoped this would be temporary, lasting up to five months. International financial analysts, however, question whether the devaluation can be held to any certain percentage, pointing out that unplugging the peso from the one-for-one exchange with the U.S. dollar could send the peso into a free fall, spurring hyperinflation. The country has been in a recession for the last four years, and in the last four weeks has had several presidents driven from office by deadly riots. None of the analysts are predicting a quick fix for the country’s financial problems.
Duke Energy has two power plants with a capacity of 550 MW in Argentina, which it bought in 1999 from Dominion Resources for $405 million, along with properties in Belize, Bolivia and Peru. The Dominion purchase included a 1,200 MW portfolio of hydroelectric, natural gas and diesel power generation businesses. Following the purchase Duke set up a Latin American division, with units for Central and Northern South America, Brazil, and the Southern Cone, encompassing Argentina, Chile, Bolivia and Uruguay. Duke had not returned phone calls by press time.
The Argentine government is breaking clauses in contracts with foreign companies that bought public utilities during what the Washington Post called a “massive but corruption-ridden sell-off of state enterprises during the 1990s.” The foreign companies, the Post said, were promised the right to index their prices to the U.S.dollar (on a one-to-one basis)–“a lucrative security blanket that has become a lightning rod for public criticism,” according to the Post report. This indexing won’t be allowed in the future.
The foreign-owned utilities are going to be forced to freeze their current rates while the Argentine Congress debates new, tough regulations. Most of the utilities are now Spanish-owned, according to the Post. Other South American countries have already devalued and are not expected to be severely impacted by Argentina’s problems, analysts say.
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