Enel Américas S.A.
Q1 2017 Earnings Call Transcript

Published: 5 May 2017

[Operator:]

Good day ladies and gentlemen and welcome to the Enel Americas First Quarter 2017 Results Conference Call. My name is Brian and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. During this conference, 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 Enel Americas and its management with respect to, among other things, Enel Americas' business plans; Enel Americas' cost reduction plans; trends affecting Enel Americas' 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 Enel Americas 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 Enel Americas' Annual Report on Form 20-F, included under risk factors. You may access our 20-F on the SEC's web site at www.sec.gov. Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of their dates. Enel Americas 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 Rafael De La Haza, Head of Investor Relations. Please go ahead sir.

[Rafael De La Haza:]

Good afternoon and welcome to the Enel Americas conference call on the first quarter 2017 results, which will be hosted by our CFO, Mr. Javier Galan. I am Rafael De La Haza, the Head of Investor Relations. In the following slides, we will go through the first quarter 2017 operating and financial performance and also some highlights on the progress of our strategic plan. Following the presentation, we will have the usual Q&A session opening to analysts connected to this call and on the web. Thank you again and now let me hand over the call to Javier.

[Javier Galan:]

Thank you, Rafael, and good afternoon. Let me start with some highlights of the period and recent events. During the first quarter of 2017, Enel Americas EBITDA reached $651 million, an increase of 7.1% compared to the same period of the previous year, thanks to better operating results in Colombia, Brazil and Argentina, partially compensated by Peru. This result was achieved despite a negative one-off effect in Argentina of $35 million and Brazil of $60 million, that will be analyzed later on. Excluding the positive impact of the FX conversion and the mentioned before one-ups, EBITDA would have increased by 12.3%. Let me remind you that CELG, our recently -- distribution company acquired in Brazil was in February 14 of 2017, is consolidated in these results. Net income for the period was $145 million, which represents a decrease of 42% compared to the first quarter of the previous year, mainly due to higher D&A, lower financial results, and high taxes. These effects will be explained in the next few slides. Excluding the one-off effects and tax credits not yet accounted for, the results would been substantially in line with the previous year. In Generation, we sold 13.2 terawatt hours of electricity during the period. This was an increase of 1.9 terawatts higher than the same period of the previous year. In distribution, we continued our organic growth at a good pace, adding approximately 400,000 new clients, reaching a total amount of 17 million, including both consolidation of Empresa de Energía de Cundinamarca in Colombia and CELG in Brazil. Regarding regulation, our distribution company in the area of Rio de Janeiro, Enel Distribution Rio, previously named Ampla, has recently signed an addendum to the concession agreement. The terms of the agreement are in line with our expectations announced in our strategic plan. The terms of the agreement are in line with our expectations announced in our strategic plan. The fourth regulatory cycle will be in force starting as of March 2018. I would also like to point out, that the recent extraordinary shareholders meeting held on the 27th of April of 2017 approved the exchange of the functional currency of Enel Americas from Chilean Pesos to U.S. dollars and also the cancellation of the shares acquired, as a result of the tender offer and the exercise of the withdrawal rights, in connection with this reorganization process. Finally, in terms of recent events, let me give you an update on the unfortunate disaster caused by El Niño costero phenomenon in Peru. We currently have two hydroplants out of service, totaling 150 megawatts, which are covered by our insurance policy in terms of assets and business interruption. Measures have been taken to safeguard the operation of our plants and the infrastructure and distribution. An emergency plan was activated in cooperation with the Ministry of Energy and Mining in order to guarantee service. I take this opportunity to thank all the colleagues who have been working on this emergency for their effort to restore the situation. Let me now comment the market context in the period in the following slide. GDP growth expectations for 2017 showed two different trends. A slight increase in Brazil, coming from a contraction of 3.5% in 2016, were still far from good and Colombia, Argentina and Peru, with more solid and steady growth figures. These countries are consolidating GDP growth between 2.3%, 2.8%, and 3.2% respectively. Energy demand in our concession areas has diverged from GDP growth in countries like Colombia, as a result of the governmental efforts to reduce consumption in 2016 and in Argentina, due to the tariff increase, which slows the growth of electricity consumption. In addition to lower temperatures in the first days of January in Buenos Aires. In our concession areas, in Brazil, we confirm an outward trend on top of the effects of the consolidation of CELG. Spot prices in Colombia are still high, although we no longer have the effects of El Niño brought emergency of the first quarter in 2016. Current prices are the result of normalization of hydrological conditions. Hydro reservoirs in Emgesa are now at 44% on average, while in the first quarter of 2016, the average was 26% and current prices are approximately close to $45 per megawatt hour compared with more down towards $100 per megawatt hour in the first quarter of 2016. In Brazil, prices are at higher levels compared to the first quarter of 2016, while in Peru, they remain basically stable. Finally, as you can see in the slide, the FX appreciation of Brazilian, Peruvian and Colombian currencies affected positively the conversion of our results into U.S. dollars. Let's now look at how the macro scenario affected our operating performance in slide number 4. Our net installed capacity increased by 0.5% reaching 10.8 gigawatts in the first quarter of 2017. Thanks to an upgrade of more than 50 megawatts in El Guavio, Colombia. Total net production was 1,063 gigawatt hours, higher compared to the previous year, as a result of higher production in Brazil, in Argentina and in Colombia, partially compensated by Peru. Both technologies, hydro and CCGT increased net production by 28% and 12% respectively, compared to the same period of previous year. In the same way, sales of our generation companies increased in all countries, totaling an increase of 15.1%, expanding our lone position in Brazil and Argentina, mainly due to higher electricity demand. The electricity distributed amounted to 17.9 terawatt hours, higher than in the first quarter of 2016, mainly explained by the consolidation of CELG. In Colombia, Argentina and Peru, the electricity distributed remains substantially stable. In terms of number of clients, the company added 3.5 million clients compared to the same period of previous year. The organic growth is adding 359,000 clients, the merger of Cundinamarca adds approximately 298,000 clients and the recent consolidation of CELG, increases the number of clients up to 2.8 million clients. At the end of the period, the company services 17 million clients in the region. Now we are going to take a look at Enel Americas financial statements in slide number 5. Revenues increased by 29.4% compared to the previous year, reaching $2.3 billion approximately. This positive increase is mainly due to higher revenues in Brazil and Argentina. In Brazil, the company obtained higher revenues in Cachoeira, thanks to higher energy sales in Fortaleza. Thanks to better sales prices to distributors on [indiscernible] mainly due to higher energy sales. Partially compensated by higher costs, due to the use of thermal generation. In Brazil, revenues were positively impacted by the appreciation of the Brazilian reais versus the U.S. dollar, by 19.5% for a total amount of $47 million. In Argentina, higher revenues were mainly due to the application of the new tariff RTE in Edesur. EBITDA increased by 7.1% or $44 million compared to the first quarter of last year. The FX conversion entailed a positive effect in terms of EBITDA of about $64 million, while in the period, we reduced two negative one-offs for a total amount of $95 million. $60 million related to voluntary retirement plan in CELG and $35 million due to the revaluation of fines in Argentina. Excluding FX effect and one-offs, the EBITDA would have increased 12.3% or $75 million. Net income after tax before discontinued operations reached $145 million or 41.7% less than in the same period of 2016. This is mainly explained by the combination of three factors; one, higher depreciation and amortization in the period for about $49 million, due to FX effects in amortizations in Brazil and Colombia for a total amount of $39 million and provisions for bad debt in Brazil, for about $10 million. A decrease in the financial results of $47 million versus the first quarter of 2016. The result is due to negative FX differences for about $41 million, mainly in Argentina, and a different perimeter of consolidation due to the acquisition of CELG. And the third effect, is an increasing taxes of $54 million, due to the FX effects on investments abroad on the correccion monetaria of tax purposes. Net financial debt reached $2.9 billion, which represents an increase of about $1.4 billion, mainly explained by the acquisition of CELG and the consolidation of its financial debt. The net EBITDA ratio is 1.2 times at the end of March. Let me continue with the EBITDA evolution segment by business and countries into slide number 6. In the left hand side of the slide, you can see that generation activities increased EBITDA by about 1% in nominal terms, excluding FX conversion effects, would have decreased $34 million. This operating performance was mainly due to the following events; one, lower energy prices in Colombia and lower margins. Two, lower generation in Peru, and thirdly, partial offset by high [ph] energy sales. Lower cost of gas and others in Brazil. In distribution, EBITDA decreased by about 11%. Not only due to the positive FX effect, but also thanks maybe to the impact of the new tariff regime in Argentina, which is partially compensated by the reevaluation of fines and higher demand in Colombia, due to the consolidation of Cundinamarca. Brazil had also a positive impact due to higher demand, but was offset by the one-off impact of the voluntary retirement plan provisions in CELG. We are successfully implementing and anticipating the cost reduction plan that was envisioned in our acquisition strategy. The payback period of this action is approximately one year. Now, let's analyze the key financial and economic drivers on a country by country basis, beginning with Colombia in slide number 7. Overall, EBITDA in Colombia increased by $29 million or 11% in the first quarter of 2017 compared to the same period of 2016. In the generation business, Emgesa had a 2% decrease in EBITDA, mainly due to lower energy sales prices because of better hydro conditions. This was partially compensated at higher physical sales and lower operating costs. In the distribution business, EBITDA in Codensa was 34% higher than the first quarter of 2016, explained by higher energy sale prices due to inflation, partially compensated by the slowdown in demand which decreased by 1.4% and the effect of the consolidation of Cundinamarca. CapEx in Colombia increased by $12 million, balanced between maintenance and growth CapEx. Now, let's analyze Brazil in slide number 8; in Brazil, overall EBITDA in the first quarter of 2017 increased by 13% or $19 million. Generation EBITDA increased by 52% or $31 million, thanks to lower operating costs in Fortaleza and higher physical sales in Cachoeira Dourada, due to higher demand and better prices. Our EBITDA in the distribution business decreased by 10%, mainly explained by the provision of personal expenses of $60 million in CELG due to the voluntary retired plant mentioned before applied for the company for about 600 employees. CapEx in generation was in line with the first quarter of last year, while distribution increased by 77% due to investments made in CELG. Our customer base increased by almost 209,000 clients during the period, without considering the acquisition of CELG, which added another 2.8 million clients, reaching approximately 10 million clients in Brazil. In addition, as anticipated in the highlights of the period, on March 15, Enel Distribution Rio signed an addendum to the concession agreement. These are the most significant changes versus the previous regulation. One, tariff review anticipation to March 2018. Two, new [indiscernible] for the current 11.4% to 12.3%. New set of annual regulatory non-technical energy losses limit and new set of annual regulatory service quality adequacy targets. The new framework is substantially in line with our expectations. Finally, let me conclude this slide by announcing that yesterday, Enel Brazil concluded the purchase of a further 5.04% of the share capital of CELG, previously owned by the company's employees. The value of these shares amounted to approximately $30 million. As [indiscernible] mentioned, acquisition of Enel Brazil owned a 99.88% of the total share capital of CELG. Now in slide number 9, we will see the numbers of Peru. EBITDA in Peru decreased by 4% for $60 million, reaching $130 million. This has been the result of the following; one, lower EBITDA in our generation company Edegel, which decreased by 16%, mainly explained by lower revenues, primarily explained by higher energy purchase prices in the spot market. Regarding our distribution business EBITDA in Enel Distribution Peru, it is in line with the first quarter of the previous year. This is the result of higher operating revenues, partially due to higher physical sales, compensated by higher operating costs. Total CapEx increased by $40 million, with an increase in generation, due to maintenance investments in Edegel and Epsa, while in distribution, investments remain flat. Let me finish with Argentina on slide number 10; EBITDA in Argentina increased by 10% reaching $71 million. In generation, EBITDA decreased by 18%, reaching $25 million. This is a combined effect of a negative impact of inflation on FX and lower availability of the plants. Since May 2017, new regulation will entail higher remuneration [ph] for availability. In distribution business, EBITDA increased by 39% or $30 million, mainly explained by higher revenues due to the new tariff scheme settled in February 1, 2017; partially offset by the recalculation of fines and higher costs for inflation effects. Our CapEx was decreased by 12%, mainly explained by a reduction of $50 million in Costanera, partially compensated by an increase in Edesur of $10 million, due to quality service investments. Let's have a look at our CapEx allocation in slide number 11; total growth CapEx for the period amounted to $273 million, which represents an increase of 30.5% or $77 million. Higher CapEx, was mainly due to investments in CELG and in Edesur, both to improve the quality service. In the first quarter of 2017, growth CapEx represents more than half of the total CapEx of the period. Distribution captures more than three quarters of our total investments amounting $258 million during the period, including most of the growth expenditure targeting improvements of quality service. From a geographical point of view, 49% of the investments are devoted to our subsidiaries in Brazil. CapEx in Peru, Argentina and Colombia have the same magnitude, capturing a share between 15% and 21%. Let me continue this section, by showing you the distribution of EBITDA and net income by country and business on slide number 12. As you can see, Colombia continues to be the most important country for us in terms of EBITDA, while in terms of business, we see that EBITDA is very balanced between generation and distribution. In slide number 15, let's take a look at the net income of the company. During the first period, the company reduced depreciation and amortization for the amount of $174 million, reaching an EBIT of $476 million. Net financial expenses amounted to $197 million, $47 million more than the same period of the previous year. This is mainly due to the following; one, a negative exchange differences of a total amount of $41 million, mainly in Argentina. Higher net financial costs, mainly due to the application of the EC-12 [ph] in Brazil, affected by lower inflation, partially compensated by a lower impact. And the actualization of fines in Argentina versus the first quarter of the previous year, totaling $4 million. And thirdly, a reduction of financial expenses on financial debt, basically in Brazil and in Colombia, after the effect of the financial expenses from the consolidation of CELG. Income tax registered in the period was $137 million. The increase in the effective tax rate versus the first quarter of the previous year, is mainly due to the registration of non-deductible costs in Brazil, due to the provision of the retirement plans and in Argentina, due to a tax credit not yet registered. These effects will be reverted during the year. Non-deductible for tax purposes. Net income amounted for $143 million. With all these elements, let us analyze the cash flow and debt during the first quarter of 2017 in the following slides. Beginning with the cash flow evolution on slide number 14. Funds from operations amounted to $201 million. This result includes the effect of an increase in our net working capital needs of $230 million. Financial expenses paid have been $52 million, mainly in Colombia and Brazil, partially compensated by the positive effect of hedge effects, derivatives, mainly related to the acquisition of CELG. The free cash flow generated during the period after maintenance and growth CapEx amounted to $71 million. Dividends paid during the period amounted to $142 million and finally, as you can see in the right hand side of the slide, extraordinary operations amounted to $1,069 million, related to the acquisition of CELG. In Enel Americas, approximately $741 million financed the capital increase in Enel Brazil and $235 million were due to loans granted to that company. At Enel Brazil level, we had the effect of the CELG debt consolidation, partially compensated by receivables consolidated totaling $104 million. Gross debt amounted to $4.6 billion with an increase of $359 million versus the previous year. This growth is explained by the decrease of approximately $1 billion in consolidated cash position, net of about $1.4 billion increased in net debt, both due to the acquisition of CELG. This increase in net debt is mainly attributable for about $0.9 billion to increases in Enel Americas. The breakdown by currency reflects the debt policy of the company assigning the debt in the same currency in which cash is produced. The only exception is the holding at functional currency in U.S. dollars and Peru having partial debt in U.S. dollars as well. We have experienced a significant decrease in the cost of debt, mainly due to lower financial costs in Colombia and in Brazil, as a consequence of the active management of our portfolio debt. Now, we are going to finish with closing remarks of the period for the following slides. Let me conclude this presentation, highlighting the solid operating performance of the company. We are very satisfied with positive results obtained in the first quarter of 2017, where we registered a significant increase in EBITDA, in line with the company's targets, and mainly attributable to the good performance of the generation business, as well as the significant growth in revenue, mostly due to higher sales recorded in Brazil and Argentina. As you know, on February 14, 2017, Enel Brazil subsidiary of Enel Americas, completed the purchase of 94.8% of the same capital in CELG, a distribution company located in the state of Goias. As announced before, Enel Brazil acquired yesterday a further 5.0% in CELG share capital. In Argentina, the company is already operating over the new and favorable regulatory tariff scheme. In Brazil, the addendum of the contract was signed in March. New regulatory frameworks in both countries were approved as expected, in terms of timing and conditions. Finally, as I mentioned at the beginning of this conference call, the new functional currency of Enel Americas is the U.S. dollar. The change was something recommended by our investors and analysts in line with other multinational companies operating in Latin America some years ago. The new functional currency will entail significant benefits, one of the most important one will be the reduction of costs related to FX effect to hedge the conversion from local currencies to Chilean Pesos. Thank you for your attention. I now pass the call to the operator for the Q&A session. Please operator, proceed.

[Operator:]

[Operator Instructions]. And the first question comes from the line of Enrico Bartoli from MainFirst. Sir, your line is now open.

[Enrico Bartoli:]

Hi. Good afternoon and thanks for taking my question. First of all, a couple of questions regarding Colombia. You mentioned reduction in the unit margins in the generation business. Could you please elaborate a bit more on this, and could you provide some outlook for the next quarter? Do you think that the situation in terms of unit margins and prices is going to improve compared to the first quarter? Regarding Colombia, also would be interesting, a comment on the reduction in demand, your distribution area; do you think that the situation could be improving over the next quarters? Then I have a question regarding Edesur; net of defined EBITDA should be around $80 million in the first quarter. Could we take this as a proxy for the quarterly contribution from this company over the next quarters? And finally on CELG, also in this case, net of the one-off costs, EBITDA would be around $20 million. Can this be considered a proxy for the next quarters? Thank you.

[Javier Galan:]

Could you repeat the second and the third one please?

[Enrico Bartoli:]

The second is related to the decline in demand in distribution area in Colombia? If you think if the situation is going to improve? And the third one is related to Edesur; adding the $35 million of the fine, EBITDA would be around $80 million. This is a good proxy for the quarterly EBITDA over the next quarters.

[Javier Galan:]

Regarding generation, let me remind you Enrico, that the first quarter of last year was very exceptional. In terms that, as you may remember, there was a very important drop, and Emgesa benefitted from very high prices now, so I would say in this quarter, in terms of generation is more a normalized quarter and will not have this specific benefit that we had in the last year. In terms of demand in Colombia, I think that we are still suffering from the campaign that was in place for last year. Remember also, we are taking into consideration this specific -- this extraordinary situation, that drought. So there was -- it was an important campaign from the government in order to take [indiscernible] in the users of energy. So I think we are still suffering from that. We hope that in the next month, maybe we will continue. But in the future, will be more in normalized terms, according to the growth of GDP. In terms of Edesur, the question was exactly?

[Enrico Bartoli:]

Yes, you had -- if I'm right, $46 million EBITDA in the first quarter, which include $35 million related to the fine. So a normalized level would be around $80 million. Is this a good proxy for the quarterly EBITDA over the next quarters, after the regulatory view that you had?

[Javier Galan:]

Yeah I would say that yes, the $35 million is basically an update of the fines that we have already recorded in the books, and these are not within the fines related to the tariff increase. So those fines to clients are related to the tariffs. So the tariffs have been increased. The fines have already been adopted to that. In terms of what we are expecting as -- in terms of EBITDA, at the end of the year, I think that the figures we have done, given some numbers, plans in the long term, which we confirm.

[Enrico Bartoli:]

Okay. And the last one, regarding CELG. Was in this case -- yeah?

[Javier Galan:]

Yes. CELG we made this extraordinary provision for retirement plan, which implies retirement of approximately 600 people. I think we are anticipating that the plan that we already have envisaged in our plans, and I think this is a very positive action and this is going to be repaid in approximately one year, the payback for this action. So most of this extraordinary effect of the first quarter will be recovered during the year, and we -- while we can tell you that we still confirm the numbers we gave, in terms of where we expect to be in 2019 in the level for 250. I think things are evolving very quickly and well in the direction we were expecting, so I would say we are looking positive at the results of CELG.

[Enrico Bartoli:]

Okay. Thank you very much.

[Operator:]

Our next question comes from the line of Arturo Murúa from Santander. Sir, your line is now open.

[Arturo Murúa:]

Thanks for the call guys, and congratulations for results. I was wondering if you could give more color in the new agreement of Ampla, the new agreement of the fourth cycle, a part of the anticipation of one year? What else we have in this new addendum? Thanks.

[Javier Galan:]

Okay. I think this is a -- as mentioned, this is one, what we are expecting in Ampla, is an important turnaround, basically that the effects will be -- basically 2018. As I said, we will be having the fourth cycle from March 2018. Investments that have been done in the last years and even investments in the relevant part of this year will be accounted for [indiscernible] and for the remodulation purposes. We will have the increase for the cycle in terms of WAC [ph] that I mentioned before. Basically, we have also been revised the -- and adopted from the losses, unregulatory losses, compared to real losses that we were having at the time. So basically, we are very close to what we are really having right now. We have not achieved, I would say, all that we wanted in this regard, But basically, we are very close to that. So basically, I mean, we had a recognition of three -- 3.3 percentage points in terms of losses higher than the ones that we had, so that will have also an important effect. So basically those are, I would say that the most relevant issues, that puts Ampla in the situation of being generating positive cash at least in 2018.

[Arturo Murúa:]

Perfect. Very clear. Thanks Javier.

[Operator:]

[Operator Instructions]. I am showing no further questions. And I will now turn the call back to you, Mr. Javier Galan. For any further remarks.

[Javier Galan:]

Yes, I think there is another question from [indiscernible]?

[Operator:]

[indiscernible] Ramirez From Disk Asset [ph]. Your line is now open.

[Unidentified Analyst:]

Thank you very much guys for the conference and the ability to make questions. And my question comes online on -- in Argentinean side. After the RTI that was signed during the first quarter, I am still wondering, what is the actual level of asset base that was recognized within that tariff revision? And if you can update the effect of the progression of the increase in the tariff that is not going to be -- it wasn't all within the actualization of the tariff, and you are going to have few installments in terms of increasing tariff. So what should we expect in terms of development in the Argentinean side going forward with the tariff increase that should happen within the year in July and in November, if I am not mistaken?

[Javier Galan:]

Yes. We have -- I mean, basically the WAC [ph] was not an official number given by the administration. What we had recognized the value added for the distribution of the number that we can build up and we have commented in previous occasions, that we think the number that we have buildup is approximately $2.5 billion equivalent. So basically that is the level of assets that are being remunerated with this new system. Now in terms of the tariff scheme, we are already billing this increase in the month of February. So we are already -- reduced 42% [ph] in additional tariff and we are already billing that. We have also recorded it in our numbers, the portion of the tariff that will be a build and cash in the 42 installments that we have presented in this new tariff scheme. And then we will have this additional increase in the month of November of tariff. So I think that things are going well in terms of our relationship with clients, our relationship with regulation. So I think there is no more additional comments on the new regime.

[Unidentified Analyst:]

Perfect. That was mainly my question in my side.

[Javier Galan:]

Okay.

[Operator:]

And I am showing no further questions. So now I'd like to turn the call back to Mr. Javier Galan for any further remarks.

[Javier Galan:]

Thank you very much. If there are no additional questions for the moment, I conclude this conference call. I remind you that our Investor Relations team will be glad to assist you with any further questions you may have. Thank you and have a nice evening.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today's program and you may all disconnect. Everyone have a great day.