Letter from the Chairman
Dear Shareholders,
As chairman of the Board it is my pleasure to submit for your approval the Annual Report and Financial Statements for the financial year ending December 31, 2007.
First of all, I would like to point out that, as of December 14, AEI has become one of the company's stock owners, after it purchased the shares held by PSEG. This means that AEI now holds 37.9% of Luz del Sur's shares, a figure similar to that of Sempra Energy International.
AEI owns and runs business operations associated with the energy sector in emerging markets. It caters for over 4.6 million clients, in 19 countries, through the group's 43 companies. This group specializes in energy distribution, electric power generation, natural gas transportation and associated services, as well as distribution of natural gas and fuel to small-scale operations. AEI has over 60,000 kilometers of pipes to transport gas and liquids, 134,000 kilometers of electricity distribution lines, 1,735 MW of generating capacity, and over 1,500 filling stations.
As regards the Company's performance, I must highlight, as pointed out in the past, that power generating companies have little interest in signing power supply and energy contracts with power distribution companies. This is due to the fact that the Supervising Agency for Energy Investment (Osinergmin) has set busbar prices on power supplied to the public electricity service, in other words, it has set a regulatory managed market. This situation makes it impossible for power distribution companies to comply with the obligation established in the Electrical Concessions Act, whereby these companies must obtain, with at least two years in advance, power supplies for the public electricity service.
In order to temporarily --up to December 31, 2007 -- overcome such a delicate situation, placing the supply of power for the electricity regulated market at risk, the government enacted Law 28447, at the end of December 2004. This law allowed energy distribution companies to withdraw energy from the system, in order to supply energy to the public electricity service at busbar prices. Additionally, it deferred the obligation on power distribution companies of having effective contracts to ensure energy supplies to the public electricity service for a minimum 24-month period.
In order to seek a definite solution and cover public electricity service needs, the government enacted, in mid-2006, Law 28832, better known as the "Efficient Generation Act". This law created, among other, an bidding mechanism whereby power distribution companies can tender their power and energy needs. In turn, power generating companies can offer prices that must not exceed the undisclosed price set by Osinergmin.
Luz del Sur carried out its first tender, under this framework, on December 18, 2006, requesting power and energy for a four-year period. Offers were received for 650 MW, only 55.7% of requested needs, to be delivered as of January 1, 2007. This allowed Luz del Sur to cover its 2007 energy needs for the public electricity service sector, and to partially cover those for the following years. Therefore, based on these results and the corresponding regulatory framework, Luz del Sur convened a second tender, held on March 16, 2007; however, no bids were received during the tender process. This confirmed the lack of interest by power generating companies in providing energy for the public electricity service.
Subsequently, Luz del Sur participated in five tenders; four convened by Edelnor and one by Luz del Sur. Three out of the first four were declared partially abandoned, and the fourth one declared unsuccessful as no offers were received . Luz del Sur tendered its power needs to cover the January 2008 . September 2009 period; however, it only managed to fully cover its energy needs up to August 2008.
The tender convened by Luz del Sur, which took place in December 2007, sought to cover the company's energy needs from October 2009 up to December 2012. This tender process was only partially successful since only 73.6% of the monthly required needs were covered through this tender process.
In view of repeated unsuccessful tender bids, the government enacted Law 29179 which, in practice, is an extension of Law 28447. This law will remain in force until December 31, 2008, to ensure that power capacity demands for the public electricity service are duly covered.
On the financial front, it is worth noting, that as a result of the company's efficient management policies, profits amounted to 190 million soles. In turn, operating profits rose to 329 million soles, a 15% increase compared with 2006.
Total sales amounted to 1.392 billion soles, and sales volume increased by 7.6%. In 2007, the number of customers rose 2.8% as 21,210 new clients joined the company, pushing the total number up to 809,037. These excellent results are a clear sign of the huge potential Luz del Sur has in its concession zone. An area that includes the most important residential, commercial and services areas in Lima, which also reports intense industrial activity in several business sectors.
Bearing in mind the company's overall plan, which seeks to increase technological standards and the productivity of assets, the $34 million investment program for 2007 was primarily used to expand and enhance the power grid and to purchase machinery and equipment. Such investment plans clearly reflect our commitment towards providing quality service to our customers.
Furthermore, these investments have allowed us to improve the company's quality index, reducing the frequency and duration of unforeseen outages that decreased 28% and 8%, respectively. Likewise, significant improvement and expansion of public lighting services have taken place. This has been achieved by changing street light fixtures, increasing street bulb brightness, and replacing corroded lamp posts. These improvements have been praised and welcomed both by the community and local authorities.
So far as safety is concerned, the Company has exceeded its target and achieved higher index scores. This clearly speaks of the company's growing safety concern and the responsibility shown by our employees to ensure their jobs are carried out in full compliance with established regulations. Furthermore, an audit to the company's contractors took place, so as to inspect whether they also comply with Luz del Sur's directives, which often exceed those set by authorities. The audit included safety aspects as well as strict and full compliance of labor regulations, such as social security payments, health insurance programs, among others.
Luz del Sur continues to deploy efforts to try and reduce energy losses. The company introduced an aggressive campaign to detect thefts and began filing public complaints against offenders. As a result, the company has reported a 7.6% drop in energy losses.
In order to respond to growing energy and capacity needs, Luz del Sur has carried out several important electricity projects to increase transformation capacity at five of its sub-stations. This has resulted in a 70 MVA capacity transformation increase. Likewise, a 39 MVA increase also took place in transportation capacity of 60 kV transmission lines.
Luz del Sur has achieved huge national reputation. Once again, it was awarded the "Company of the Year," trophy and it also received the "Red and White Ribbon" prize as the country's top electrical utility company.
One aspect that is worth highlighting is social responsibility. Luz del Sur is aware of the important role it plays within Peru's society, and the support and help it can provide to the country's poorest. Thus, Luz del Sur continues to develop community outreach activities, which include:
Last, but by no means least, I must highlight the company's leadership, which thanks to the effort of all our employees and management team, has placed Luz del Sur as one of the country's top power distribution companies and among the most important in the South American region.
The company continues to face huge challenges as regards market regulations and service quality. Nevertheless, we feel confident that the vast experience gained over the years together with Luz del Sur's great achievements that will enable us to successfully rise to these challenges.
Finally, I wish to thank all our employees for their commitment, dedication, and effort in complying with the company's objectives. On behalf of the Board, I would also like to thank our shareholders for their trust and continued support.
Sincerely yours,
Eduardo Pawluszek
Chairman of the Board