Empresas Copec's Q2 net income up 7.9% year-over-year to US$272M, revenues soar 86.3% to US$5.59B with recovery of production rates after earthquake, increased pulp prices on steady demand from China, other markets

SANTIAGO, Chile , August 29, 2011 (press release) – • Net income accumulated up to June 2011 was 48.3% up on the same period of the previous year and amounted to US$568 million. Consolidated earnings were US$10,438 million, surging 117.5% on those of the previous year. The consolidated accumulated EBITDA amounted to US$1,120 million, increasing 33.7% on that in 2010. The increased income was mainly due to higher operating income in the forestry and fuels businesses. There were price and volume increases in the wood pulp, panels and sawn lumber lines of the forestry businesss, and in the fuels business Copec had higher physical sales and there was consolidation of Terpel’s operations.

• Net income was US$20 million up on that of the second quarter of 2010 amounting to US$272 million. The difference is essentially explained by higher operating income, highlighting increased result in the forestry and fuels sectors. The forestry business had higher sales in the wood pulp, panels and sawn lumber businesses. Non- operating income increased, mainly due to increased other revenue related to a higher valuation of biological assets and to results related to Terpel Colombia. There was also a favorable exchange rate difference effect.

• Net income was 7.7% down on that in the first quarter of 2011, due to the lower performance of the fuels business. That was because of the high comparison base of the previous quarter, when there was an increase in margins and an effect of the first in first out (FIFO) costing system in a scenario of fuel price increases. That was partly offset by higher operating income at Arauco. Non-operating income rose US$26 million, mainly explained by an increase in other revenues related to a higher valuation of biological assets and results related to Terpel Colombia.

• The development highlights in the last few months included: Abastible entering the liquefied petroleum gas (LPG) market in Colombia, the final approval of the Mina Invierno project on Riesco Island, Arauco signing an agreement to sell carbon bonds, and the creation of an executive vice-presidency at Arauco. Finallaly, an update is presented on the forestry projects.

HIGHLIGHTS OF THE QUARTER
Abastible enters the Colombian LPG market
After meeting the timescales established and reported on May 19, the due diligence process was completed for Abastible to enter the Colombian company Inversiones del Nordeste S.A.S (IN).

Agreements were thereby entered into and formalized for Abastible to acquire a 51% stake of IN. This deal entailed an investment of COL$139 billion (US$77 million), which will mainly be used to capitalize IN, giving it the resources needed for its future development plans.

IN is a leading company in the liquefied petroleum gas (LPG) market in Colombia, and owns various regional LPG distribution companies with annual sales of 200,000 tons, giving it a 34% market share. IN’s operating affiliates cover virtually all the departments in Colombia, and IN owns a company that makes gas bottles and storage tanks and another bottled and bulk gas trucking company.

Committee of Ministers gives definitive go-ahead to Mina Invierno

A Committee of Ministers approved the Mina Invierno project that Minera Isla Riesco will carry out in the district of Río Verde. This approval validates the environmental proceedings that were unanimously approved in February, and only 15 remarks made by 4 individuals or entities were partially accepted.

The aim of this mining and port project is to replace 30% of the current coal imports from Australia, Colombia and other countries, and it will entail a total investment of around US$530 million. The first stage of the project will also generate about 700 jobs, of which at least 80% will be filled by workers and professionals from the local region of Magallanes.
In this same area of activity, Empresas Copec incorporated the society Camino Nevado Limitada, bringing together the assets of the Company in the mining sector, so as to allow proper use of knowledge and best practices in this industry. The shares in Minera Isla Riesco and Minera Can-Can will be transferred to this new company.

Arauco signs a deal with a Danish company to sell carbon bonds

The affiliate Arauco signed a deal with the Danish company Nordjysk Elhandel to sell 100,000 emission reduction certificates (ERCs) amounting to the equivalent of US$2 million. This new sale is in addition to the 1,070,788 certificates already sold by Arauco in previous years.

Arauco creates Executive Vice-Presidency

Arauco’s board of directors agreed to create the executive vice- presidency that will report directly to the board of the company. Mr Matías Domeyko, who was the general manager up to now, was appointed the new executive vice-president.

He will report directly to the board, and will mainly be focused on the company’s strategic planning, international development and expansion, driving the integration of the different businesses of the Arauco group of companies, embracing the best international practices on corporate governance, and generally boosting the management and development of the company and its affiliates, and coordinating compliance with the guidelines established by the board. The company general manager will report to him.

Moreover, Mr Cristián Infante, who was the corporate operations and development manager, was appointed the new company general manager. In the last few years he worked as an executive in charge of the affiliates in Argentina and Brazil. He has also been very involved in the Montes del Plata wood pulp project in Uruguay.

Progress of Arauco’s projects

Arauco expects the Montes del Plata project to close funding in September and begin its operations in the first quarter of 2013. Regarding the panel projects, the MDP plant in Teno has an advance of 50% and has already begun assembling equipment, is expected to start production in 1Q 12. Meanwhile, the expansion of the MDF plant in Jaguariaíva, Brazil, shows 41% completeness and is expected to become operational in the first half of 2012.

CONSOLIDATED RESULTS

2Q11 vs. 2Q10. Net income in the quarter, net of minority participation, was 7.9% up on that in the second quarter of 2010 and amounted to US$272 million. That was mainly due to operating and non-operating income increasing 14.7% and 41.2%, respectively.

The Company’s gross margin was up 45.7% amounting to US$1,572 million, which mainly came from affiliates Arauco, accounting for US$853 million; Copec accounting for US$593 million; Abastible for US$86 million; Igemar for US$29 million and Sonacol for US$26 million.

The increase in the Company’s gross margin was largely due to the better performance of the forestry business, particularly wood pulp, with prices remaining high for over 12 months because of steady demand from China and other markets. Sales volumes increased due to the recovery of Arauco’s production rates after being severely hit by the earthquake on February 27, 2010. The panels business had a better performance with higher prices and volumes.

The fuels business also had an increase in sales volumes. That was mainly because of higher service station demand, related to a more dynamic Chilean economy. The slight volume increase trend continued in the industrial channel, after the leveling out of the drop in demand from electric power generating companies due to greater supply of natural gas and the start-up of coal-fired thermal power stations. Moreover, income expressed in US dollars rose because of the lower exchange rate in the second quarter of 2011 compared to the average of the same period in 2010. In addition to all this, there was the consolidation of Terpel’s income.

Non-operating income rose in the other revenue account, mainly because of a higher valuation of biological assets and acknowledgement of results related to Terpel Colombia. There was also higher income from financial earnings and greater income from the related companies Metrogas and Guacolda. All this is partially offset by higher financial costs in Copec and higher other expenses, mainly in Arauco.

2Q11 vs. 1Q11. Net income was 7.7% down on that in the previous quarter.

Operating income fell 14.6%, largely due to lower income from the affiliate Copec on account of the high comparison base of the previous quarter when there was an increase in margins and an effect of the FIFO costing system in a scenario of fuel price increases. That was partly offset by the higher operating income from Abastible and the forestry and fisheries businesses.

Non-operating income rose US$26 million, largely because of an increase in other revenues due to acknowledging results related to Terpel Colombia, lower other expenses and higher income from the related companies Metrogas, Guacolda and Corpesca. That was partially offset by greater financial costs and a less favorable exchange rate difference.

2011 vs. 2010 (accum.) Consolidated net income as of June 2011, net of minority participation, was US$568 million, 48.3% up on that of the same period in 2010, essentially because of higher operating income.

The company’s increased operating income was due to the better performance of the forestry sector, after sales volumes were hit hard early in 2010 by the stoppage of production in the aftermath of the earthquake of February 2010. The last facility to resume operations was line II of Arauco’s wood pulp mill, which started up again in late January 2011. Prices of all forestry products have increased compared to the same period in 2010.

There were higher sales volumes in the fuels business, mainly because of increased demand in the industrial channel and from service stations due to a more dynamic Chilean economy. Moreover, income expressed in US dollars rose due to the lower exchange rate in 2011 compared to the average in the first half of 2010. There was also the consolidation of Terpel’s figures.

In regard to non-operating income, there was a more favorable effect due to higher other revenue related to the greater valuation of biological assets, acknowledging income from hedging operations in T erpel Colombia, and a more favorable exchange rate difference, mainly related to the US dollar value of financial placements and other assets expressed in Chilean pesos, Euros and Reales. That was partly offset by higher financial costs and other expenses, essentially related to the affiliate Copec.

This year, results of the Colombian subsidiary Proenergía, indirect parent company of Organization Terpel, have been consolidated. To date revenues for US$ 2,652 million, EBITDA for US$ 124 million and net income for Copec of US$ 13 million, have been recognized in the income statement.

CELULOSA ARAUCO Y CONSTITUCIÓN (CONSOLIDATED)

2Q11 vs. 2Q10. Arauco had net income of US$182 million in the second quarter of 2011 that was up on the US$174 million in the same quarter of 2010. This is explained by operating income increasing 5.6% because of higher sales in the wood pulp, panels and sawn lumber businesses. Non- operating income fell 37.2% due to higher other expenses by function. That was partly offset by increased income from exchange rate differences because of the effect of the depreciation of the US dollar against the Chilean peso and Euro on assets stated in those currencies, such as financial investments and recoverable taxes. There were also higher other revenues by function, related to the greater valuation of biological assets. The company’s EBITDA fell 4.5% and amounted to US$363 million.

Consolidated earnings were up 30.0%, partly because of a 42.2% increase in wood pulp sales, driven by volumes increasing 42.3%. Volume was hit by the stoppage of operations due to the earthquake in February 2010. Regarding this, in late January 2011 Arauco’s line II started a trial run and all the productive units are therefore now operating.

The second quarter of 2011 was a period of changes in market trends, expected and generally seasonal changes.
Although April and May were months of strong demand and high prices, the upward trend did not continue, and price adjustments in different markets became evident in June. Demand started to dwindle in China, typical of the lower activity in the summer months. The situation was quite similar in the rest of Asia and Europe and in some of these markets the paper surplus production is still having a major impact on the margins of paper companies. This led to paper mill closures in countries like Korea and Switzerland. Better months are generally expected, but not until the last quarter of this year.

The sales increase in the quarter was also because of panel revenues rising 24.3% on account of prices and volumes increasing 9.7% and 13.3%, respectively. Plywood sales increased because of greater shipments to Europe and Asia with a large price recovery, and volume increased sharply to the United States but with more stable prices. MDF volumes fell, mainly because of a drop in Brazil and Chile. In regard to MDF moldings, the market is still quite sluggish on account of the dwindling demand in the US construction market.

Sawn lumber sales rose 14.8% as a result of prices increasing 20.8%, partly offset by a 5.0% volume decrease. Demand for forestry products in the second quarter of this year was good across most markets, especially Asia. That led to higher sales prices in China, Korea, Japan and Taiwan.

2Q11 vs. 1Q11 Arauco had higher net income than the US$172 million in the previous quarter. That was principally due to increased operating income because of higher sales across all product lines. Non-operating income, however, plunged MMUS$ 10.

Operating revenue was up 13.4% on the first quarter of 2011. Wood pulp sales rose 14.9%, arising from volumes and prices increasing 8.9% and 5.0%, respectively. Despite the rise in sales, volumes were affected by a labor strike which took place in June at port Lirquén. This situation was rapidly normalized.

Sawn lumber revenues rose 4.5% due to a 10.9% price increase. Volumes, however, fell 5.8%. The US real estate and construction market continued at a low ebb in the second quarter of 2011. The start of house construction reached 629,000 units in June. Current construction levels are still low compared to the average in the last 10 years. Molding and timber sales prices recovered compared to the first quarter of 2011 due to higher market demand.

Panel revenues increased 14.5%, mainly because of a 16.6% volume increase, which was offset by prices dropping 1.8%.

2011 vs. 2010 (accum.) Arauco had net income of US$354 million in 2011 against the US$237 million the previous year. This difference is essentially explained by a US$80 million increase in operating income amounting to US$431 million, and higher non-operating income of US$77 million amounting to US$23 million. In regard to the latter, there was increased income from exchange rate differences because of the effect of the depreciation of the US dollar against the Chilean peso and Euro on assets stated in those currencies, such as financial investments and recoverable taxes. There were also higher other revenues by function, related to the greater valuation of biological assets.

Higher operating income is explained by an increase in revenues across all the business lines. The wood pulp area rose 39.9%, arising from higher prices and volumes of 7.5% and 28.4%, respectively. These were hit by the stoppage of production due to the earthquake in February 2010. In regard to this, Arauco’s Line II started a trial run process in late January 2011, and all the productive units are now operating.

Panel revenues surged 21.4% due to volume and prices increasing 6.0% and 14.5%, respectively. Sawn lumber revenues rose 32.2%, on account of volume and prices increasing 12.5% and 17.5%, respectively.

COPEC (CONSOLIDATED)

2Q11 vs. 2Q10. Copec had net income of Ch$20,155 million in the second quarter of 2011 against Ch$27,900 million in the same period in 2010. Operating income rose 20.1% due to higher physical sales and the consolidation of Terpel’s operations. EBITDA surged 40.9% and amounted to Ch$53,179 million.

The higher operating income was offset by lower non-operating income, mainly because of greater financial costs, an increase in the other expenses by function account and lower income from exchange rate differences. There was also a large increase in income tax expenses, mainly from Terpel.

Physical fuel sales increased 3.1%, particularly because of greater demand from the dealer channel. The volume increase trend continued in the industrial channel after the leveling out of the drop in demand from electric power generating companies due to greater supply of natural gas and the start-up of coal-fired thermal power plants. Market share dropped from 61.1% to 58.6%.

2Q11 vs. 1Q11. Net income in the quarter was Ch$27,428 million down on the previous quarter. That difference is mainly explained by lower operating income of Ch$44,863 million, which was due to lower margins and a high comparison base, related to higher margins and to the positive effect in the first quarter of the FIFO costing system in a scenario of higher fuel prices in that period. EBITDA declined by 45.8%. On the other hand, non-operating income increased by Ch$8,044 million, largely on account of higher other revenues, related toacknowledging income from financial hedging operations in Terpel Colombia.

2011 vs. 2010 (accum.) Copec had net income of Ch$67,738 million in 2011 against the Ch$60,374 million in 2010. That is mainly explained by higher operating income because of increased physical sales, better margins, the consolidation of Proenergia’s (Terpel) income and the positive effects of the FIFO costing system early in the year in a scenario of fuel price increases. That was partly offset by higher financial costs and an increase in the other expenses by function account.

Physical fuel sales rose 3.2%, especially because of the increase in the dealer channel, partly due to the more dynamic economy. The industrial channel showed signs of stability and even slight growth after having suffered two years of decreases, on account of lower demand from electric power generating companies due to the increased supply of natural gas, the start-up of coal-fired thermal power plants and greater use of natural gas by industrial customers in the Metropolitan region to replace liquefied fuels. All this led to market share dipping from 61.1% to 58.5%.

ABASTIBLE

2Q11 vs. 2Q10. Abastible had a slight net income decrease of 0.2% in the second quarter of 2011 amounting to Ch$8,946 million. That is explained by operating income rising 11.0% due to higher physical sales, partly offset by non-operating income decreasing 156.4% because of lower income from participation in related companies, readjustment units, exchange rate differences, and higher financial costs, because of the greater debt level. The company’s EBITDA was up 12.9% amounting to Ch$14,670 million.

The company had sales of 108 thousand tons of liquefied gas in the quarter, which was 1.7% up on sales in the second quarter of 2010, giving it a market share of 34.8%. Although deliveries in the bottled channel remained stable, bulk gas sales rose due to higher demand from industrial customers.

2Q11 vs. 1Q11. Abastible’s net income rose 33.0%, largely due to operating income increasing Ch$3,529 million, because physical sales increased 33.0%. Abastible had sales increases in the bottled and bulk channels, driven by the seasonality of the winter months. Non-operating income rose Ch$216 million on account of higher income from related companies, partly offset by lower income due to readjustment units. EBITDA was 32.3% up on that in the first quarter of 2011.

2011 vs. 2010 (accum.) Abastible had a net income increase of 9.7% in 2011 amounting to Ch$15,674 million. That was due to higher operating income, because of increased physical sales in the bottled and bulk channels. Non-operating income fell Ch$794 million.

The company had sales of 189 thousand tons of liquefied gas in 2011, which was 3.7% up on those in 2010 and giving it a market share of 34.9%. Bulk gas sales increased significantly due to a more dynamic economy and the recovery of some important industries for Abastible. EBITDA was 14.4% up on the first half of 2010.

PESQUERA IQUIQUE-GUANAYE (IGEMAR, CONSOLIDATED)

2Q11 vs. 2Q10. Igemar had net income of US$4.9 million in the second quarter of 2011 against the US$6.0 million in the same period in 2010. Higher operating income was partly due to greater catches in 2011, mainly because of the establishment of Orizon from the merger of SPK and San José. There was also the fact that in the second quarter of 2010 income was hit by the production stoppage because of the earthquake early in the year. The drop in non-operating income is explained by higher other expenditure and the lower performance of the related company Corpesca.

Operating income was US$6.4 million against the US$3.0 million in 2010. Physical fishmeal sales were 12 thousand tons, which was a 40.1% increase on those the previous year. Physical fish oil sales rose 29.6% on last year amounting to 4.5 thousand tons and 502 thousand boxes of canned seafood were sold, soaring 298.8% on the previous year. Frozen seafood sales were 876.4% up on the previous year and amounted to 7.3 thousand tons. The fish processed reached 135 thousand tons, surging 84.5%.

2Q11 vs. 1Q11. Net income was US$4.0 million in the quarter against the US$0.9 million in the previous quarter. This was driven by operating income increasing US$3.3 million, because of a higher gross margin on account of greater fishmeal, canned and frozen seafood product sales. Non-operating income was also up because of the better performance of the related company Corpesca and a more favorable exchange rate difference effect.

2011 vs. 2010 (accum.) Igemar had net income of US$5.8 million in 2011 against net income of US$5.9 million as of June 2010. That is mainly explained by non-operating income dropping US$6.7 million, arising from higher other expenses and lower income from related the company Corpesca.

However, the company had an operating income gain of US$9.4 million, US$6.6 million up on that in 2010. Physical fishmeal sales soared 108.1% on the previous year amounting to 24 thousand tons. Physical fish oil sales were 6.1 thousand tons, a 67.5% increase on last year. 936 thousand boxes of canned seafood were sold, surging 218.7% on the previous year, and frozen seafood product sales amounted to 12.7 thousand tons, 303.0% up on the previous year. The fish processed increased by 140.9% and amounted to 270 thousand tons.

Fishmeal prices fell 12% and fish oil prices rose 49%. Canned and frozen seafood prices rose 39% and 106%, respectively.

OTHER AFFILIATES

Sonacol

Sonacol had net income of Ch$4,803 million in the second quarter of 2011 against Ch$4,789 million in the same quarter of 2010. That was essentially due to higher operating income, related to the greater volumes pipelined, and increased non-operating income, partly on account of lower financial costs.

In accumulated terms, Sonacol’s net income amounted to Ch$8,611 million, increasing Ch$564 million on the previous year. That increase was mainly because of higher operating income on account of the volume pipelined rising 3.6% and lower net financial costs.

OTHER RELATED COMPANIES

Metrogas

Metrogas had net income of Ch$19,339 million in the second quarter of 2011, which was a 136.7% increase on that in 2010. That was mainly driven by operating and non-operating income increasing Ch$10,827 million and Ch$1,731 million, respectively, mainly because of higher income from participation in related companies and a more favorable exchange rate difference.

Metrogas had net income of Ch$29,711 million in the first half of the year against the Ch$8,549 million in 2010. In operating terms, the gross margin soared 75.7%. Physical sales were up 10.6%, mainly related to increased supply to industrial customers because of the availability of liquefied natural gas (LNG) from the start-up of the terminal at Quintero. There was also higher consumption by residential customers and increased gas sales to generate electricity. Non-operating income had a lower loss of Ch$2,568 million, mainly explained by higher income from earnings in related companies, related to the participation in LNG at Quintero, and a more favorable exchange rate difference.

Corpesca

Corpesca had net income of US$9.5 million in the second quarter of 2011, a US$5.9 million drop on 2010. That is largely explained by a lower gross margin and higher other expenses by function.

Net income accumulated up to June 2011 was US$14.9 million against the US$23.8 million in the first half of 2010. Operating income fell US$4.5 million due to fishmeal prices dropping 3.3% and higher sales costs. That was due to the higher stock value early in the year, a decrease in the exchange rate and increased fuel prices. Fish oil prices surged 60.5%. The fishmeal volume rose 28.9% on 2010 and fish oil sales surged 101.2%. In non-operating terms, other expenses rose US$7.2 million.

Guacolda

Guacolda had net income of US$23.1 million in the second quarter of 2011, which was a 78.1% increase on that in 2010 and was driven by a US$12.7 million increase in operating income.

Guacolda had net income of US$38.4 million in the year, which was up on the US$26.6 million in 2010. The gross margin was US$73.5 million and was US$16.8 million up on that of the previous year. Energy sales increased by 16.4% due to the start-up of unit 4 as of March 2010. In regard to non-operating income, there was lower income from exchange rate differences and higher financial costs, related to the start-up of the new power plants.

CONSOLIDATED BALANCE SHEET ANALYSIS

The following are the main assets and liabilities:

Consolidated current assets rose 8.5% as of June 30, 2011, compared to those for the year ended December 31, 2010. The higher trade receivables and inventories, mostly from the fuels and forestry businesses and related to the greater commercial activity, mainly accounted for such increase. There was, however, a decrease in cash and cash equivalents, principally arising from the investments made and dividends paid in the quarter.

Non-current assets were up 4.6% as of June 30, 2011 against those at the 2010 year-end. There was an increase in the property, plant and equipment accounts, and in investments recorded using the equity method and intangibles, all related to the investments made.

Current liabilities climbed 25.6%, mainly because of an increase in accounts payable and other current financial liabilities, and both increases were mainly related to the working capital of the fuels business. Non-current liabilities remained at very similar levels to those at the close of the previous year, and there was only a slight drop in financial liabilities and an increase in liabilities due to deferred tax.

The Company’s shareholders’ equity ended the quarter 4.4% up on that at December 2010, highlighting the increase in withheld profits generated by accumulated income.

CASH FLOW STATEMENT ANALYSIS

The operating cash flow as of June 2011 was 38.6% down on the previous year, basically due to higher income tax payments, particularly in the affiliate Copec. There were also greater payments to and on behalf of employees. That was partially offset by other charges arising from the operation.

Regarding the investing cash flow, in the second quarter of 2011 there was a 25.6% increase in disbursements compared to the second quarter of 2010. The incorporation of property, plant and equipment increased by 48.0%, mainly in the forestry and fuels businesses.

There was also a US$105 million increase in loans to related companies, mainly destinated to Montes del Plata and Isla Riesco projects, and a large disbursement to buy intangible assets, principally related to the affiliate Can-Can acquiring mining claims. We also highlight the disbursement of US$ 77 million related to the acquisition of 51% of Inversiones del Nordeste in Colombia.

The financing cash flow amounted to revenue of US$1.7 million against expenditure of US$133 million in 2010. That difference is explained by the higher net securing of loans this year, essentially related to the affiliate Arauco.

Industry Intelligence Editor's Note: In an omitted table, Copec reported Q2 consolidated revenues of US$5.59 billion. For the same period a year ago, the company recorded net income of US$253 million and consolidated revenues of US$3.0 billion.

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