Enel Américas S.A.
Q1 2015 Earnings Call Transcript

Published: 3 May 2015

[Operator:]

Good day ladies and gentlemen. Welcome to the Q1, 2015 Enersis SA Earnings Conference Call. My name is Mark and I'll 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. [Operator Instruction] During this conference call, we may make statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act 1995. These statements can include statements regarding the intent, belief or current expectations of Enersis and its management with respect to, among other things, Enersis’s business plans, Enersis cost reduction plans, trends affecting Enersis financial condition 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 effects of any changes in the laws and regulations applicable to Enersis or its affiliates. Such forward-looking statements reflect only our current expectations, are not guarantees of future performances 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 Enersis 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 those forward- looking statements, which speak only as of their dates. Enersis 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. Javier Galan, Enersis CFO. Please proceed.

[Javier Galan:]

Good morning everyone. And welcome to our first quarter of 2015 results conference call. I am Javier Galan, CFO and with me today is Pedro Canamero, our Investor Relations Director. Please let me remind you that the presentation will follow the slide that has been uploaded to our website. Also, as always, we will have the usual question-and-answer session at the end of the presentation. On Slide number 2, I will start by outlining the key highlights during the period. Yesterday, the Board of Directors of Enersis, Endesa Chile and Chilectra decided to proceed with the assessment of a possible corporate reorganization to separate power generation and distribution activities in Chile from those in all the Latin American countries. Moving on to the first quarter results, EBITDA surpassed $800 million, increasing 27%. This was due to both our distribution and power generation activities. Net income attributable to Enersis controlling shareholders increased by 99%, reaching $245 million due to strong operational performance and lower tax expenses compared with last year. Finally, we are expecting to have Bocamina II up and running in the first half of the year subject to final approvals and to finalize El Quimbo hydro project during the second part of the year. Now I would like to focus your attention on the initiative proposed to our Board of Directors yesterday on slide number 3. The Board of Directors of Enersis have decided unanimously to commence the assessment of a corporate reorganization aimed at separating the generation and distribution activities in Chile from other activities conducted outside Chile by Enersis and its subsidiaries, Endesa Chile and Chilectra. The objective of this reorganization is to overcome certain duplications and overlaps that result from the current complex corporate structure of the Enersis Group and to create value for all of its shareholders. To this end, the company intends to analyze possible reorganization consisting in the division of Enersis, Endesa Chile and Chilectra by separating one – on the one hand, the generation and distribution businesses in Chile and on the other hand the business activities outside Chile and the case may be a subsequent merger into one single company of the companies holding assets outside of Chile, which result from the above divisions. Under this reorganizational initiative; one, none of the transactions would require the contribution of additional financial resources from the shareholders; two, furthermore, the shareholders will maintain the same stake in the new companies resulting from the divisions described above as they previously hold; three, the new companies created as a result of this reorganization will also be based in Chile and the shares would be listed on the same exchanges where the companies within the Enersis Group are listed currently. The Board of Directors of Enersis has instructed the management to analyze this possible reorganization taking into account the corporate interest and the interests of all shareholders and all the stakeholders with a special attention to the interests of minority shareholders and to convey these initiatives to the Board of Directors of Endesa Chile and Chilectra. If approved by the Board of Directors of the three companies, the proposed reorganization would be subject to the approval of the respective shareholders meetings. The company will keep marketing for other progress of this initiative. Let me now show the evolution of Enersis main financial figures on slide number 4. Consolidated EBITDA increased 27%. This result is mainly explained by; one, the average electricity demand increase of 3.2% during the first quarter in addition to higher average prices, the positive impact of our Argentinean operations in distribution due to Resolution 32 in the amount of $8 million, the full consolidation of Gas Atacama in Chile for $25 million and a higher generation output and physical sales in all the countries with the exception of Brazil. Net income attributable to Enersis controlling shareholders increased by 99% or a $122 million, thanks to a combination of better operational results, the positive effect of the additional minority's interest acquired during 2014 in El Quimbo that are held on Gas Atacama and lower taxes, which decreased by 24% during the period. Let me give you an update on the regulatory front before explaining the EBITDA evolution for the period on slide number 5. In Argentina, during January 2015, our subsidiaries covered about $70 million in recognized MMC past costs since February temporary Resolution number 32, we've covered current operating and maintaining expenses. The accumulated amount through March, 2015 was $30 million covering two months. In this sense we're also having conversations with the Argentinean regulatory authorities to reach a final agreement on an integral tariff more adjusted to the real costs of the component. In Colombia the wealth tax of the full year recorded in January impacted EBITDA by $23 million. Also, we are expecting to have the final WACC definition of the new regulatory cycle during the second half of 2015. In Brazil Coelce and Ampla increased tariffs by 22% and 57% respectively between March and April this year after annual and the extraordinary tariff review. Also the new regulatory WACC was set at 8.09% real per tax. Now on next slide, you will find a snapshot of our EBITDA evolution. As you can see, EBITDA increased in Chile, Peru and Argentina. In particular the good result in Chile were related to the full consolidation of GasAtacama and effective energy management, which offset the lost energy output of Bocamina II with new Iberoamerica thermal production. In Argentina, the substantial EBITDA increased during the quarter was related to the already mentioned positive regulatory impact in distribution. This positive evolution of margins has been partially offset by lower hydro generation in the Cachoeira Dourada plant in Brazil, and the impact on EBITDA of the wealth tax in Colombia already mentioned. In the next slide, you will find a brief explanation of the EBITDA breakdown by country and by business. During the first quarter of the year, Colombia and Chile accounted for 50% of our EBITDA. I would also highlight the four countries including Argentina had positive contribution to margins. Finally, as you can see on the right hand side, EBITDA continues to be well balanced between generation and distribution activities. Let's now have a look at the main drivers of our group net income on Slide 8. Depreciation and amortization increased 8% reaching $205 million during the period. Financial expenses increased by 23% reaching $121 million. It was mainly the result of a lower financial revenue equal to $49 million related to the final value of our long-term financial assets in Brazil IFRIC 12 and lower cash available related to the use of funds. Additionally, there were also greater financial expenses in Edesur partially compensated for the positive impact of lower debt and DockSud after its debt capitalization, and in Endesa Costanera after its debt renegotiation. Finally, after taxes for an amount of $152 million, total net income increased by more than 90% to $370 million of which $245 million is attributable to analysis controlling shareholders and $125 million to minority interests. Let me now focus your attention on the capital expenditure structure. During the period, Enersis invested $390 million devoting 33% to the growth and development of new projects such as the construction of the new power facilities Los Condores in Chile and El Quimbo in Colombia, which is expected to enter into operations this year. The remaining portion was invested in the maintenance of fixed assets. Nearly 62% of total CapEx is invested in generation while 38% is linked through distribution. Finally, let me highlight the geographical allocation of resources across the five different countries, where we operate. As of today, most of our investments are in Colombia and Brazil, basically explained by the construction of El Quimbo power plant and the investment on the Brazilian networks. Now let me analyze the net free cash flow generation of the Company. The Group has shown a strong cash flow generation based on the stability of the operations in the region and the growth in terms of electricity demand. This cash generation allows Enersis to meet its investment needs. During the period, Enersis invested $390 million and paid nearly $92 million in financial expenses linked to the several funding sources allocated in our affiliates. Additionally, almost $200 million has been distributed to the shareholders of Enersis including minorities. As a result, the Group had a positive free cash flow of $174 million. This result coupled with positive cash effects related to Tunel el Melon transaction of $18 million and a currency exchange effects in our debt and in the amount of $192 million, impacted on our net debt by $18 million, a 1% increase compared with December 2014. The next slide as you can see, the debt. Net debt in the first quarter of 2015 remained flat compared to the same period last year. Gross debt at the end of the period equaled $5.5 billion and the average cost of debt remains stable at 8.3%. Enersis shows strong financial position. Total liquidity was $3.8 billion allowing us to easily service our debt throughout 2017. This liquidity position includes committed and uncommitted credit lines of $1.4 billion and cash and cash equivalents of $2.4 billion of which $1.3 billion are related to 2015 capital increase. Our short-term maturities are $401 million for 2015 and $807 million for 2016. Thank you very much. Now, let me hand over to the operator for the Q&A session. Please.

[Operator:]

[Operator Instruction] Your first question comes from the line of Javier Suarez from Mediobanca. Please proceed.

[Javier Suarez:]

Hi. Good morning. And this is Javier Suarez from Mediobanca in Milan. I have three questions. The first one is on the restructuring of your activity seen in Latin America. In this, in Enersis Chile, can you clarify or give us an indication if you intend to maintain Chilectra and Endesa Chile as listed on vehicles below Enersis Chile, that should be a company listed in the Chilean market? Also related to the reflected in Latin America, Enersis America should be a company listed in Chile, and then there are going to be subsidiaries basically operated on accounting basis. Do you intend to create a single company to manage the whole of Enersis America? And in that, how do you intend to complete that operation? That is on the restructuring of Latin America. On the financials, looking at the free cash flow, the cash flow statement in slide number 10, can you explain the net working capital evolution of plus €185 million? And the final question is on Argentina. Can you update on your negotiation with the government to move your operation in Argentina to a tariff that reflects [indiscernible] when this may happen, and what you're expecting from these negotiations? Many thanks.

[Javier Galan:]

Thank you for your questions. Regarding restructuring, the different questions you mentioned, I think it's important to say that we have - yes, the Board of Directors of Endesa Chile and Chilectra has agreed to study an initiative of proposal. So, it is very premature to define what is going to be the outcome of this potential reorganization. As it has been publicly communicated, which is the general terms of this proposal that you know, but nowadays we need to analyze this proposal and if we think it is a proposal that solves some of the issues that I mentioned before, I think the Board of Directors, when it is out, will debate and decide regarding this operation. The proposal, as you know, is that the companies will be based in Chile, the new companies, and their shares would be listed on the same exchanges where the companies within the Enersis Group are listed nowadays. Regarding Argentina, to your third question is, yes I think the Resolution 32 that was approved on mid- March, applicable on February, I think is relevant for us in terms that this temporarily resolutions that cover our operating costs and I think this is very relevant step in order to achieve integral tariff final resolution and regulation. Regarding when this is going to take place, I think there's a process now in Argentina of elections and I imagine that this will be a discussion to be held with the future cabinet of government of Argentina. Regarding working capital, because of dividend flows paid and received only on the temporary effects.

[Javier Suarez:]

That's fine, many thanks.

[Operator:]

Your next question comes from Charles Fishman from Morningstar. Please proceed.

[Charles Fishman:]

Thank you. I'm still confused on the $185 million that's listed on the waterfall chart on slide 10. What that represents again?

[Javier Galan:]

Yes, hold on a second. Excuse me - this is - are proceeds during the first quarter dividends from affiliated companies that we haven't paid yet on dividends flow. So that's the - basically that is the number. A positive delta is that we have received a certain amount of dividends that we haven't paid dividends so far.

[Charles Fishman:]

Okay. So we will reverse in the next period.

[Javier Galan:]

Yes, it will be adjusted.

[Charles Fishman:]

Thank you. And then my another question is on the separation. Based on your comments about the shares trading on the same exchanges, then will the Enersis Chile and Enersis Americas also trade with ADRs on the New York Stock Exchange?

[Javier Galan:]

The proposal that we are analyzing is, that's it. Yes.

[Charles Fishman:]

And then why doesn't Enel's ownership of Enersis Americas fall below the 60.6%, just to be on slide 3?

[Javier Galan:]

I think, the idea on the chart, it is shown that after all this processed, if there - if a merger takes place which also should be decided by the Board and shareholders, this is - the proposal is saying that Enel will not lose control of that vehicle. That is what it is said. It doesn't mean that it's going to lose its 60%, it means that the requirement on the transaction would be for the controlling shareholder to maintain control.

[Charles Fishman:]

Would there being outside capital as part of the reorganization coming in?

[Javier Galan:]

As I said before, I mean, we are in the process of analyzing the transaction, but as I stated, the transaction will not imply any additional cash contribution from any shareholder.

[Charles Fishman:]

Okay. And then my final question on Bocamina II. It was my understanding that plant had environmental restrictions and you expressed confidence that it will be in operation by mid-year. What was done to resolve that?

[Javier Galan:]

We're paying an Environmental Resolution this year on the month - at the beginning of April. So from, - let's say from an environmental point of view, all the requirements have been complied. So we are just adjusting some technical issues that need to be put in place and that's why we are fully confident that the plant will be in operation as we said during this quarter.

[Charles Fishman:]

So no additional capital was needed, was just a question of fulfilling certain regulatory requirements?

[Javier Galan:]

It is already considered.

[Operator:]

Your next question comes from the line of Enrico Bartoli from MainFirst. Please proceed.

[Enrico Bartoli:]

Hi, good afternoon. Three questions from my side. Just to roll back on Argentina, is it correct to say that, the Resolution 32 allows you to recover around $40 million per month? And for how long this is going to last? So, are we going to see some positive contribution also in the second quarter this year? Then I've a question related to the same slide 5, regarding Ampla you mentioned a 37% increase in tariffs extraordinary and due to their periodic revision. Could you split the 37% between the extraordinary component and the normal component? Then a question regarding the tax rate, if I am right, it dropped very significantly in the first quarter, could you elaborate a bit about this? And if we can expect the tax rate to remain around 25% to 26% also for the rest of the year? And finally on the re-organization, in the presentation you published yesterday, you mentioned that one of the condition is that the Resolution 67 of 2002 is expected just - probably is a bit preliminary, but do you have an idea is the fact that the generation distribution after their possible reorganization would be controlled by the same company Enersis Chile would fulfill the requirements by this law? Thank you very much.

[Javier Galan:]

Okay. Regarding Argentina, yes, you are correct. We expect to receive on a regular basis $40 million per month. Yes, this regulation is temporary, it's not the final, but we expect that this situation that this agreement remains until we obtain our final tariff with the scheme. So yes, we are counting on having this flow during the whole year. On the second question you mentioned, this increase in tariff of Ampla on the 37%, ordinary is 10.5%, and the rest is extraordinary. With that issue, we may say that this decrease of 24% was mainly as a consequence of a higher foreign tax credits and higher taxable losses related with FX exchange on foreign investments. In the first quarter 2014, we didn't record tax credit because it was canceled due to the costs associated with foreign investments. This is a number - reorganization as I said before, I mean, we don't know which is going to be the outcome. Yes, what we want to state that there is some - let's say, some constraints regarding these and one of the constraints is the current regulation and regulatory scheme and the 667, we will comply with this regulation if it is in place.

[Enrico Bartoli:]

Sorry, just a clarification on Argentina. I understood well that the $40 million per month are expected to be received till the end of this year?

[Javier Galan:]

If we don't have a reorganization regarding a final scheme on tariffs.

[Enrico Bartoli:]

Okay. But the current resolution is also for February and March, and if there is no additional agreement, it is going expire?

[Javier Galan:]

No, the agreement is a temporary agreement for the full year.

[Enrico Bartoli:]

For the full year, perfect. Thank you.

[Operator:]

Your next question comes from the line of Moovin from Brandstein. Please proceed.

[Unidentified Analyst:]

Good morning and thanks for taking my questions. Just two please. The first one, if I look at the EBITDA movement between your Q1 last year and this year, is there any chance you could help us understand, how much of the movement is recurring and how much is non-recurring. So if I want to look at the full-year EBITDA, actually EBITDA for 2016, how much of the improvement can I assume that will be there and will be permanent for the company? The second question, if I look at the Slide 13 when you have a breakdown of country by country demand and price, and what I've seen is that despite the increase in electricity demand across all countries, spot price have been going down and I understand the part of it will be probably from the impact of commodity, but do you see any risk for the structural declining in power price going forward for these countries? Should we extrapolate this trend as a long-term trend? Thank you.

[Operator:]

Speaker, can you please make turn the line to mute.

[Javier Galan:]

Yes. In terms for your first question regarding first quarter 2014, first quarter 2015. Recurrent is all is all recurrent except what we have accounted for this year on the first quarter in Argentina, adjustments on MMC, which is an amount of $70 million. The rest is recurrent.

[Unidentified Analyst:]

Thank you.

[Javier Galan:]

Could you repeat your second question, and excuse me.

[Operator:]

[Operator Instruction]

[Javier Galan:]

Would you please - your second question, can you make your second question, please?

[Operator:]

Please repeat your second question.

[Unidentified Analyst:]

Right, thanks. My second question is more of a long-term question. If I look at slide 13, in your presentation, clearly power demand has been going up across all countries, but we've seen a declining in power price and this trend has been going on for quite a while. Now apart from the impact of commodity price i.e. oil prices, do you see any other structural factor that drive this declining in the power prices? And do you think this is a long-term trend? Thank you.

[Javier Galan:]

Yes, in the long term, we assume that prices might decline, mainly due to the impact of higher hydrology.

[Unidentified Analyst:]

All right. Thank you.

[Operator:]

Your next question comes from Gustavo Fingeret of Itau. Please proceed.

[Gustavo Fingeret:]

Hi, good morning guys, thank you for the call. My question is related to the restructuring plan that you have and what do you - and what Enersis controllers said two years ago during the follow-on. At that time the company, was expected to invest two-third of cash in buying minorities and the estimated acquisition multiple between 9 and 10 times. Should we expect that to continue to be in placed on this restructuring plan? The company is expecting to make acquisitions in minority stake at higher multiples using higher amount of cash, what do we should expect?

[Javier Galan:]

Okay. Thank you, Gustavo. Yes. I think the commitment of the use of proceeds is still in place. And we will continue to analyze potential opportunities that create value for Enersis as the ones we have already executed. That is what - again this reorganization, if it takes place, we'll not change this commitment.

[Gustavo Fingeret:]

So that means that you have now only $500 – something million dollars to be invest in the minorities based on what you've already invested?

[Javier Galan:]

We have $1.3 billion on cash available from the use of proceeds.

[Gustavo Fingeret:]

Okay, two-third was to buy minorities and one-third to make M&A. That's why I'm saying, and you already invested some of that in buying minorities?

[Javier Galan:]

No, we do not have any special restrictions on [indiscernible] this cash will be used on one M&A or buyout of minorities.

[Gustavo Fingeret:]

Okay. So, the guidance given two years ago is no longer in place?

[Javier Galan:]

It wasn't -- as I know, it wasn't a guidance. It was the use of proceeds and it do not have any type of limitation.

[Gustavo Fingeret:]

No, the guidance given by - in this I’m looking to your presentation was two-third - expecting to be two-third in minorities, one-third in M&As, 9 to 10 times be for in minorities, 10 to 15 times be for acquisitions in M&A? The guidance okay, it could be high - `something higher or lower?

[Javier Galan:]

It was a tentative idea, but that was our commitment.

[Gustavo Fingeret:]

No, no, I'll check it again, it was not commitment. So now it's now - it's still not a commitment?

[Javier Galan:]

No, it’s not a commitment.

[Gustavo Fingeret:]

Okay.

[Operator:]

I would now like to turn over to Javier Galan for closing remarks.

[Javier Galan:]

Thank you very much. Well, it seems there are no more questions I would like to thank you for your time and your attention. Remember that our Investor Relations team will be glad to assist you in any further questions you may have. Have a nice day and good bye.

[Operator:]

Thank you very much. This concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.