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Despite Slow First Quarter, Duke Energy Remains A Safe Dividend Play

Summary Duke Energy’s first quarter 2015 EPS of $1.24 beat estimates by $0.10, while Revenue of $6.06 billion missed expectations by $240 million. The company’s residential retail energy market declined as a result of more efficient energy practices and the company’s international business segment declined due to issues n Brazil. I believe Duke Energy stock presents a safe dividend play with opportunity for slow stock appreciation going forward. On May 1, 2015, Duke Energy Corporation (NYSE: DUK ) reported their first quarter of 2015 earnings results and provided an update on their four financial objectives for 2015 and beyond-(1) current year earnings guidance, (2) long-term earnings growth, (3) dividend growth, and (4) balance sheet strength. In this article, I will review the company’s four financial objectives and analyze their progress in obtaining them. Achieve 2015 earnings per share within guidance range of $4.55 and $4.75 Capital expenditures are expected to fall within the range of $7.4 and $7.8 billion for the year. In the first quarter of 2015, the company had $1.45 billion in capital expenditures putting the annualized projection to $5.8 billion. While the capital expenditures projection is lagging behind projections, management expects the economic development usage of the expenditures to result in almost 3,000 new jobs as the company makes commitments to pursue alternative energy generation sources. The company saw retail load growth of 0.5% to 1.0% for the year. The weather normalized retail growth rate decrease 0.2% year-over-year largely due to the 2014 polar vertex. The strong performance in the industrial market was offset by the disappointing residential market performance. The residential market experienced lower usage year-over-year due to changes in energy efficiency and conservation, polar vertex in 2014, and higher use of multi-family housing. There were 700M average shares outstanding at 12/31/2015. The company had 708M outstanding shares at 3/31/2015, up from 707M at 12/31/14. The company does not have any planned equity issuances through 2017. We saw $65 per barrel average Brent crude price for 2015. Oil price projections have remained consistent to projections as the expected Brent crude oil prices have increased from EIA’s February 2015 report of $57.56 to $61 in May 2015’s report . The joint venture, National Menthol Company (NMC), which runs through 2032, is 25% owned by Duke Energy. NMC’s earnings are positively correlated with crude oil prices and an approximate $10 per barrel change in the average annual price of Brent crude oil has roughly a $0.01 to $0.02 EPS impact annually. There was an exchange rate of approximately 2.85 BRL/US dollar. The exchange rate has increased above this expected rate to $3.01 on 5/13/2015 as the Brazilian economy struggles and the US economy rebounds. The continued drought conditions, struggling Brazilian economy, and weaker foreign currency exchange rates are the largest factors behind the $0.13 year-over-year quarterly earnings per share decline in the company’s international segment. The ongoing drought in the country has caused the company to dispatch higher cost thermal generation instead of the low cost hydro generation. Additionally, the struggling economy has caused the company to lower demand growth for 2015 between 0% and 2%, which is much lower than the greater than 3% seen over the past several years. Deliver earnings per share growth of 4% to 6% through 2017 There was retail load growth of 1% going forward. The company has been stagnant with a 0.6% retail load growth from 2012 and 2014. As seen by the decrease in the first quarter of 2015, I think it is going to be very difficult for the company to achieve a 1% growth going forward. I think it is going to be difficult to achieve because of the lower energy usages in homes. I don’t see this trend reversing and allowing this 1% growth rate to be achieved. The company expects total wholesale net margin to increase due to the new 20-year contract with NCEMC at Duke Energy Progress (began in 2013) and 18-year contract with Central EMC at Duke Energy Carolinas growing to a load of 900MW in 2019 from 115MW in 2013. FY2015’s total wholesale net margin is expected to be approximately $1.1 billion with an anticipated 5% compound annual growth rate. The regulated earnings base growth is expected to follow the $2 billion growth trend in 2015 that was seen in 2014. Continue growing the dividend within a 65% to 70% target payout ratio On May 7, 2015, Duke Energy declared a quarterly cash dividend of $0.795 per share, in line with previous quarterly dividends. Management expects the dividend to rise to $3.24 per share in 2015 (almost 2% increase year-over-year). With the Company achieving a payout ratio close to 70% and management’s commitment to paying out a quarterly dividend to investors, I do not see the company’s current 4% dividend yield to be at risk. Management has paid 89 consecutive years of dividends with increases coming the past 7 years. This is largely possible due to the Company’s strong balance sheet and no planned equity issuances through 2017. In addition, the company announced a strategically tax-efficient way to repatriate $2.7 billion back to the U.S. during the fourth quarter 2014 earnings call, which will help fuel the dividend increases going forward. Maintain strong, investment-grade credit ratings. While the company’s credit rating was recently upgraded by S&P, I believe there are three primary risks for the company going forward. The exposure to Brazil is a significant risk for the company’s future, which was seen in the 2014 financial results. In 2014, there was a decrease in sales volume as well as higher purchased power costs due to the interruptions in the hydrology production. Per the earning’s call, they are assuming normal hydrology despite the rainy season starting slowly. Brazil is a major story to follow for Duke Energy in 2015 and beyond as the Company is predicting EPS growth from this business segment despite recent downward trends in profits there as well as the Brazilian economy. I think the company will have difficulty increasing the retail load growth to 1% given the increased technologies and social initiatives to decrease electric use. Oil prices will continue to be a wild card going forward. Forecasting a price on such a volatile asset is a difficult task. If oil prices continue to fluctuate widely, it will significantly impact the company’s bottom line. Conclusion Duke Energy faces some difficult obstacles including a slowing Brazilian economy, lower residential energy usage, and volatile oil prices; however, I believe that the company gave conservative and very obtainable estimates in each of the key assumptions used to allow them to meet their financial objectives for FY 2015 and beyond. While I don’t see Duke Energy being a rapid growth story going forward which can be seen in the lagging capital expenditures, I do believe they have the ability to present slow stock appreciation with the safety of a consistent dividend. Disclosure: The author is long DUK. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

To Hedge Or Not To Hedge?

This is an updated version of an ETF Specialist originally published on Feb. 19, 2014. Currency-hedged exchange-traded funds have come into vogue of late in the United States. Investor interest was first piqued by the performance of the oldest and largest of them all: WisdomTree Japan Hedged Equity (NYSEARCA: DXJ ) . The fund owns a portfolio of dividend-paying Japanese stocks that generate more than 80% of their revenue outside of Japan. It gained nearly 42% in 2013, as a massive dose of monetary stimulus contributed to an 18% decline in the value of the Japanese yen, and steady improvement in the global economy gave Japan’s stock market an additional boost. In contrast, iShares MSCI Japan ETF (NYSEARCA: EWJ ) , which tracks a standard market-cap-weighted benchmark and does not hedge its yen exposure, increased by 26% in 2013. Clearly, it paid for U.S. investors in Japanese stocks to have a hedge against a declining yen over this span. But was this a flash in the pan, or do currency hedges have value over longer time frames? With the U.S. dollar marching steadily higher–thanks in part to (relatively) attractive interest rates–and double-digit moves in major currencies making headlines, now is a good time for investors to explore these questions. Back to Basics: Return, Risk, and the Practicalities of Putting a Currency Hedge in Place In simple terms, a domestic investor’s local-currency-denominated return in a foreign security (or a portfolio of them) is equal to the foreign security’s (or portfolio’s) return plus the foreign currency return, plus the product of the foreign security return and the foreign currency return. The last part of this equation accounts for the interplay between the two, and as it is the product of these two figures, its contribution to the overall return will grow as either the foreign asset return or the foreign security return grows larger. Domestic Currency Return = Foreign Security Return + Foreign Currency Return + (Foreign Security Return x Foreign Currency Return) The effect of fluctuating exchange rates can either help or hurt returns. In the case of U.S. investors holding Japanese stocks, the yen’s depreciation hurt the U.S. dollar return for unhedged investors in 2013, as evidenced in part by the iShares fund’s relative underperformance versus the WisdomTree offering. In another extreme example, the 34% appreciation of the Brazilian real contributed to the 124% calendar-year return posted by iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ) in 2009. These examples highlight that currency effects can be extreme in magnitude. It’s also important to consider currencies’ effect on the risk of a portfolio of foreign securities: The expression for the variance (the square root of which is the standard deviation) of a foreign security or portfolio’s returns is as follows: σ 2 $ = σ 2 LC + σ 2 S + 2σ LC σ S ρ LC,S, where σ 2 $ = the variance of the foreign asset returns in U.S. dollar terms; σ 2 LC = the variance of the foreign asset in local-currency terms; σ LC = the standard deviation of the foreign asset in local-currency terms; 2 S = the variance of the foreign currency; σ s = the standard deviation of the foreign currency; ρ LC,S = the correlation between the returns of the foreign asset in local-currency terms and movements in the foreign currency. This expression demonstrates that the volatility of a foreign asset in domestic-currency terms is directly related to the volatility of the asset in local-currency terms (the first term in the expression) and the volatility of the foreign currency (the second term). It also shows that the higher the correlation between the foreign asset in local-currency terms and movements in the foreign currency, the greater the variance will be in local currency terms. (Again, take the square root and you’ll get the standard deviation.) Hedging away currency exposure will reduce risk, as measured by standard deviation–as can be seen in Exhibit 3 below. How does currency hedging work in practice? Most currency-hedged ETFs will use currency forward contracts to reduce their foreign-currency exposure. A currency forward contract is an agreement between two parties to buy or sell a prespecified amount of a currency at some point in the future (typically one month out in the case of currency-hedged ETFs) at an exchange rate agreed upon between the two parties. Because the value of the forward contract is fixed ahead of time, and the value of the fund will fluctuate during the course of a month as asset prices and cash flows into and out of the fund fluctuate, the forward may not be a perfect hedge. It’s also important to note that these hedges come at a cost, though their price tag typically amounts to just a few basis points in the case of developed-markets currencies in stable interest-rate environments. FX Effects It is useful to look at historical data to frame the effects of currency hedging on investment performance (for U.S. investors in this case). There are two key elements to consider when assessing the effects of currencies on equity portfolios: their contribution to return (as covered above) and their contribution to risk. Exhibit 1 shows “success ratios” for a trio of MSCI benchmarks over the 20-year period ended Jan. 31, 2015. These benchmarks are all tracked by one or more currency-hedged (and unhedged) ETFs. The success ratio represents the portion of the overlapping monthly rolling one-, three-, and five-year periods over these two decades during which the unhedged version of the index outperformed its fully hedged counterpart. For example, the MSCI EAFE Index outperformed its fully hedged counterpart in 59% of these overlapping rolling one-year periods over this 20-year span. In hindsight, in the case of the MSCI EAFE and MSCI Germany benchmarks, the winner could have been predicted by the flip of a (mostly) fair coin. The story is different when it comes to the MSCI Japan Index, where “getting the yen out” has clearly paid off more often than not. Exhibit 2 contains the annualized average returns for each benchmark across each of the overlapping monthly rolling one-, three-, and five-year periods dating back 20 years from the end of January 2015. The differences in relative performance vary between the hedged and unhedged versions of these indexes depending on the length of the measurement period. The MSCI Japan Index is again a unique case, as evidenced by the yawning performance differential between its hedged and unhedged versions. What about risk? Currency risk is a significant contributor to overall risk in the context of a foreign-equity portfolio. Exhibit 3 shows the trailing 20-year annualized standard deviations and Sharpe ratios for the same benchmarks featured in the first two exhibits. In the case of all three benchmarks, it is clear–as evidenced by the difference in Sharpe ratios between the U.S. dollar and hedged versions of the indexes–that currency exposure is a meaningful source of risk, currency hedging can serve to mitigate this risk, and it may ultimately result in superior risk-adjusted performance. To Hedge or Not to Hedge? The best answer to the question of whether it makes sense to hedge the currency exposure of an international-stock portfolio is this: It depends. By hedging foreign-currency exposure, investors can mitigate a source of risk–but at the expense of a potential source of return. The trade-off between the two is important, and investors’ decisions will depend on a variety of factors, including but not limited to their return requirements, risk tolerance, investment horizon, and the costs associated with hedging currency exposure. Disclosure: Morningstar, Inc. licenses its indexes to institutions for a variety of reasons, including the creation of investment products and the benchmarking of existing products. When licensing indexes for the creation or benchmarking of investment products, Morningstar receives fees that are mainly based on fund assets under management. As of Sept. 30, 2012, AlphaPro Management, BlackRock Asset Management, First Asset, First Trust, Invesco, Merrill Lynch, Northern Trust, Nuveen, and Van Eck license one or more Morningstar indexes for this purpose. These investment products are not sponsored, issued, marketed, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in any investment product based on or benchmarked against a Morningstar index.

Endesa Chile’s (EOC) Q4 2014 Results – Earnings Call Transcript

Endesa Chile (NYSE: EOC ) Q4 2014 Results Earnings Conference Call January 30, 2015, 9:00 am ET Executives Fernando Gardeweg – Chief Financial Officer Analysts Nicholas Schild – Santander Operator Good morning, ladies and gentlemen. Welcome to the year-end 2014 Endesa Chile SA ADS earnings conference call. My name is Kathy and I will be your operator for today. At this time, all participants are in listen-only mode, we will conduct a question-and-answer session towards the end of this conference. [Operator Instructions]. As a reminder, this call is being recorded for replay purposes. During this conference call, we may make statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements could include statements regarding the intent, belief or current expectations of Endesa Chile and its management with respect to, among other things, Endesa Chile’s business plans, Endesa Chile’s cost reduction plans, trends affecting Endesa Chile’s financial conditions or results of operations, including market trends in the electricity sector in Chile or elsewhere, supervision and regulation of the electricity sector in Chile or elsewhere and the future effect of any changes in the laws and regulations applicable to Endesa Chile or its affiliates. Such forward-looking statements reflect only our current expectations, are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those anticipated in the forward-looking statements as a result of various factors. These factors include a decline in the equity capital markets of the United States or Chile, an increase in the market rates of interest in the United States or elsewhere, adverse decisions by government regulators in Chile or elsewhere and other factors described in Endesa Chile’s Annual Report on Form 20-F, including under Risk Factors. You may access our 20-F on the SEC’s website www.sec.gov. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of that date. Endesa Chile undertakes no obligation to update these forward-looking statements or to disclose any development as a result of which these forward-looking statements become inaccurate. I would now like to turn the presentation over to Mr. Fernando Gardeweg, CFO of Endesa Chile. Please proceed, sir. Fernando Gardeweg Thank you, Kathy. Good morning everyone and welcome to Endesa Chile’s conference call to review 2014 year-end results. I am Fernando Gardeweg, CFO of the company and joining me today is Mrs. Susana Rey, Endesa Chile Investor Relations Director and our IR team. As always, we will be available to assist you and answer any questions you might have after the call. Slide two. First of all, I would like to highlight the following issues. One, operating revenues increased 21%, mainly due to higher energy sales, as a consequence of higher average sale price of electricity in Chile, Colombia and Peru. Two, hydro generation increased 10% due to better hydrology in Chile, Colombia and Argentina. Three, operating costs increased by 35% due to higher energy purchases and fuel consumption in Chile and Peru, along with higher transportation cost and other services expenses in Colombia and Peru. Four, consolidated EBITDA increased by 12%. Five, net income attributable to Endesa Chile’s shareholders decreased 5%, primarily due to non-recurring accounting effects related to the HidroAysen and Punta Alcalde. Six, consolidated generation declined only 3% despite lower thermal availability mainly explained by the Bocamina II stoppage. Let’s move to slide three. The most important consolidated changes are as follows. Net income attributable to our controlling shareholders decreased by 5% amounting $587 million, primarily due to 21% higher revenues mainly attributable to higher energy sales as a consequence of higher average sales prices of electricity in Chile, Colombia and Peru. 35% higher cost, primarily due to higher energy purchases and fuel consumption costs in Chile as a consequence of the temporary shutdown of Bocamina II. 50% lower net financial expenses mainly as a result of higher financial income in Argentina, explained by the renegotiation of Costanera debt with Mitsubishi, offset by a greater exchange difference expenses in Chile. 94% lower related company results, mainly due to the impairment of HidroAysen and the lower net income from Enel Brasil caused by lower profits from the generation business. 16% increase in taxes mainly due to higher taxable base in Colombia and Peru and higher tax rate in Chile. Lastly, consolidated EBITDA increased 12% for 2014 in comparison to 2013. In slide four, you can see each country’s contribution to our EBITDA. From the total amount of $1,920 million, 45% comes from Colombia, 34% from Chile, 17% from Peru and 4% from Argentina. Our operations in Brazil are accounted for under the equity method and contributed to a total of $109 million. In slide five, regarding our commercial policy. The company sold 16,244 gigawatt hours on the spot market. From this amount, 6% of our energy sales in Chile were sold on the spot market, 30% in Colombia, 6% in Peru and 92% in Argentina. In slide six, let’s look at our strong financial position. We have a healthy debt maturity profile. On the total debt of $3.5 billion, only 18% matures within the next two years and 89% came from Chile and Colombia. Our consolidated debt has an average life of eight years and an average cost of 7.2% when adjusted for maturity and duration. We have $552 million in cash and cash equivalent plus access to an additional $481 million of committed undrawn revolving credit line. Our leverage amounted to one times and interest coverage ratio was 7.7 times. In slide seven, you can see our free cash flow increased by 3% amounting to $643 million, as a consequence of higher EBITDA and lower net financial expenses. I would like to now give a brief summary of our operating performance on a country-by-country basis starting with slide eight. Argentina, regarding the Argentinean energy sector, energy demand in the system increased 1% reaching 126,396 gigawatt hours and price continued to be kept at 120 Argentine pesos per megawatt hour, approximately $14 per megawatt hour, as a consequence of Resolution 240 of 2003. EBITDA from our Argentina operation decreased 18% amounting to $80 million, primarily explained by 46% lower energy sale as a consequence of less sales to regulated customers in the spot market. Let me highlight that as of December, Argentine net income has increased by $116 million, following the refinancing of Endesa Costanera’s debt with Mitsubishi. The estimate FX for Endesa Chile will be additional earnings of $104 million and a reduction of financial debt of $138 million. In Chile, slide nine. Regarding the Chilean energy sector, total physical energy sales accumulated in Chile as of December 2014 were 3% higher than for the same period last year, amounting to 64,857 gigawatt hours. Total hydrology available from water flows during the year were consistently below average. In August, levels start to recover exceeding historical average level and reaching 81% of historical water flows. The total level of water stored in dams as of December 2014 had reached 30% of capacity, an improvement of 499 gigawatt hours of energy equivalent. As of December 2014, the average marginal cost reached $117 per megawatt hour, 23% lower than in 2013. EBITDA from operations in Chile increased by 2% reaching $649 million due to 7% higher physical energy sales and a greater average electricity sales price expressed in Chilean pesos. The full consolidation of GasAtacama represent an additional $80 million in EBITDA. In Colombia. Regarding the Colombian energy sector, 2014 demand in the season was 63,569 gigawatt hours, a 4% increase compared to 2013.. The total level of water stored in dams at 2014 reached 85% of capacity, representing on improvement of 310 gigawatt hour of energy equivalent. As of December 2014 the marginal cost average $58 per megawatt hour, decreasing significantly with respect to June 2013, a consequence of better hydrology. Colombian EBITDA increased by 23% reaching $866 million due to 17% higher energy sales explained by better hydro generation, lower power purchase and lower fuel costs. Also, during 2014we benefit from the regional generation resulting from the Salaco’s capacity optimization. In Peru, slide 11. Regarding the Peruvian energy sector, electricity demand reached 57,457 gigawatt hours, 5% higher than 2013, one of the highest growth rates in two years. During 2014, Edegel real water levels were similar to historical average recobering in the month of December and reaching 121% of the historical average. The total level of water storage in Edegel dams in 2014 reached 52% of capacity, similar to 2013. Marginal price in the Peruvian spot averaged $15 per megawatt hour decreasing significantly with respect to June at $32 per megawatt hour. Peruvian EBITDA increased by 17% reaching $324 million due to 14% higher energy physical sail to regulated and unregulated customers as a consequence of higher thermal generation. Finally, in slide 12. Enel Brasil EBITDA increased by 8% to $1045 million due to favorable results from the [indiscernible] primarily due to 49% higher EBITDA in [indiscernible]. Remind you that Enel Brasil is accounted for under the equity method and over 37% ownership amounted to $109 million of net attributable income from the year 2014. Regarding the Brazilian energy sector, demand for the Brazilian CIEN was 558,158 gigawatt hours, a 2% increase compared to the same period in 2013. On average, the spot price in the [indiscernible] system reached $275 per megawatt hour, 163% higher than 2013, due to lower water availability. Now let me focus in our investment during the period. In slide 13, on December 22, Laguneta, the last remaining power plant of the Salaco optimization project started its operation. With its completion, Salaco has 145 megawatts of new capacity resulting 482 gigawatt hours of estimated additional generation yearly. By the end of 2014, the project has generated 324 gigawatt hours. In slide 14, as a result of the acquisition of GasAtacama in April 2014, Endesa Chile EBITDA increased by $80 million. In slide 15. El Quimbo, our 400 megawatt installed capacity hydroelectric project continues its construction on schedule. As of December 2014, the project had reached 86% completion. We have continued securing agreements with local residents and the necessary contract to be able to carry out work on dam. We expect to begin operation of the first unit at the end of the first half of 2015. In slide 16, regarding Los Cóndores, a run of the river hydro power plant located in Chile, as of December 2014, the level of completion reached 9%. On August 2014, we signed the treatment contract and currently is under review. On November 2014, we will reach 100% of the civil work of the basic engineering of the tunnel and 40% of the backup continuing. Currently we are more than half of the assessment contract signed for the transmitter line. We expect to have most of the land available at the end of this year. In slide 17, regarding our projects. In the next five years, we are adding 670 MW and our plan includes the development of and additional 678 MW. Before ending this conference call, in slide 18, I would like to highlight the most important issues during this period. One, better operating results for 2014. Consolidated managing increased 11% mainly due to better margin in future Chile, Colombia and Peru, benefiting from our portfolio diversification. Two, diversified portfolio. Having operations in five different countries allows us to diversify risks inherent to each country. We continue to profit from our prudent commercial policies and an efficient mix of generation assets. Even though we face challenge, we improved EBITDA by 12%. Three, HidroAysen impairment, during the year, there have been two administrative resolution that forced us to rethink the project. In May 2014, the Ministers’ Committee revoked the environmental qualification resolution of the project and in January 2014, the general direction of water denied the additional water rights needed to make the project viable. Endesa Chile manifested its willingness to keep defending the water rights and the environment approval grants, continuing legal action are already underway for implementing new administrative or judicial actions to this dam. We maintain the conviction that the ecologic resources of the CIEN/Rio region are important for the country energy development. However, in the current situation there is uncertainty about the recovery of the investment made so far, since it depends on both judicial decisions and definition on matters on the energy agenda that today we are not able to provide. HidroAysen is not an immediate project of our portfolio. The company reminds that the original transmission line studies, the generating studies of the plant and the environmental were non-recoverable assets. Consequently the company decided to record a provision for impairment of $121 million, reducing net income for 2014. Four, Punta Alcalde impairment. As it has its environmental qualification resolution approved, but to complete its environmental approval, we also need the approval of the environmental impact assessment associates with the transmission line which now came in. Endesa Chile’s engineering team with the support of our coal technology experts have studied the possibilities of adapting Punta Alcalde to make it a profitable and technology more sustainable project. The conclusion they reached after one year of study is that such adaptation will involve major modifications to the approved environmental qualification resolution making the process much more difficult. The company has decided also to stop the development Punta Alcalde and the Punta Alcalde Maitencillo Transmission project, waiting to be able to clear the uncertainty about its profitability. Therefore, the company has decided to record an impairment of $22 million as of December 2014. Five, Bocamina II temporary shutdown. On November 6, 2014, the supreme court suspended the injunction and state the steps required to start operations. Endesa Chile should give warranties related to the desulfurizer and seawater suction. We are waiting for the Environmental Superintendent to certify this warranties so the plant can begin operations again. Additionally, we are still waiting for one, the outcome of the environmental court of Valdivia in order to request the annulment of the sanction under reduction of the fine received from the Environmental Superintendent and to the resolution of the environmental evaluation service of Concepcion regarding the new environmental impact study to optimize the plant. Six, Tecnimont agreement. The Board of Directors of Endesa Chile in an organization held yesterday has accepted and approved all the terms and conditions through which all the parties can end the arbitration and provide a mutual supplement for liabilities under the construction contract. As of September 2014, our financial statement on paying the claims against Endesa Chile for an amount of $1,294 million in the case of Tecnimont claims and $15 million in the case of SES with the agreement will eliminate this. Finally, as a result of the transaction, the final effect for Endesa Chile and Bocamina II project in particular will be the recognition of greater investment of $125 million. Seven, non-operating assets. Nonrecurring accounting assets related to HidroAysen and Punta Alcalde, lower results in Enel Brasil mainly due to higher energy costs in the [indiscernible] company as a result of the drought affecting Brazil, full consolidation of GasAtacama, increase in tax payment as a consequence of higher taxable base in Colombia and Peru and higher tax rate in Chile due to the recently approved tax reform and five, a larger negative foreign currency exchange affecting primarily in Argentina. As a consequence of the above mentioned, net income attributable to Endesa Chile shareholders decreased 5%. This concludes our review of Endesa Chile financial results for 2014. Now I will be glad to answer any questions you may have. Operator? Question-and-Answer Session Operator [Operator Instructions]. Sir, you have no questions at this time. [Operator Instructions]. The first question comes from Nicholas Schild from Santander. Nicholas Schild Hi. Good morning, Fernando, Thank you for taking my question. I have two questions regarding the use of cash for this year. On one side, I wanted to know if you had a final solution for the situation in San Isidro, where you are having problems for the steam tubing regarding the availability of water? And the second question is that, I noted that you were leasing a facility to AES Gener, which is Nueva Renca and I was wondering if adding Nueva Renca to supply this project in San Isidro too? Or you could have the three power plants working at full capacity at the same time and using this maybe to sell a portion on the spot market or to supply your contract in the first half of this year. Thank you. Fernando Gardeweg Thank you for your question, Nicholas. Regarding the San Isidro, since July 17, 2014 to-date, San Isidro is operating in open cycle due to the lack of water necessary for the operation of the steam cycle, the cooling systems supply. As a consequence, power generation will decrease this year of this power plant. Regarding the Endesa Chile, Gener, indeed, we signed an agreement with Gener. It is usual that generator exchange gas when they show some profit or deficit in the energy balances. Endesa Chile has made several of these exchange agreements at market prices in the past. This is a non-public bilateral short-term agreement that benefits both generators given a specific situation in the market and cannot be considered as a stable long-term contract. This type of arrangements have been done before and also been a part of the system as a whole. Nicholas Schild Okay. Thank you. Just to be sure, so the limitation of capacity is going to be also for 2015? Because I think someone told me that you built a new or the regulator authorized you to build a new well that might have a final solution for the lack of water in that facility in San Isidro specifically. Fernando Gardeweg Nicholas, we are working in trying to solve the problem. It will take us couple or maybe half a year or some many months. But we are trying to solve and reach the capacity of this power plant or the generation of the capacity of this power plant. Nicholas Schild Okay. Thank you, Fernando. Operator We have no further questions. I would now like to turn the call over to Mr. Fernando Gardeweg for closing remarks. Fernando Gardeweg Thank you, Kathy. Since there are no further question, I would like to thank you for participating in today’s conference call. If you need further assistance, our investor relations teams will gladly help you. I also invite you to visit our website where you can obtain the most relevant data concerning our company. At our website, we have also posted the complete set of financial statements. Thank you very much. Operator Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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