Enel Américas S.A.
Q2 2015 Earnings Call Transcript

Published: 29 Jul 2015

[Operator:]

Good day ladies and gentlemen. And welcome to the First Half Results of 2015 Enersis Earnings Conference Call. My name is Catherine and I’ll be your operator today. During this conference call, we may make statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements could include statements regarding the intent, belief or current expectations of Enersis and its management with respect to, among other things, Enersis’ business plans, Enersis’ cost reduction plans, trends affecting Enersis 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 the 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 and 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 their dates. Enersis undertakes no obligation to update these forward- looking statements or to disclose any developments as a result of which these forward-looking statements become inaccurate. I would now like to turn the presentation over to Mr. Javier Galán, Enersis CFO. Please proceed.

[Javier Galán:]

Hello. Good afternoon to everyone. And welcome to our conference call, which will provide an update of the Latam reorganization process in Enersis taking into account the latest SVS requirements and suggestions and yesterday’s company’s extraordinary board meeting and also to the first half 2015 results presentation. I am Javier Galán, CFO of the company and with me today is Pedro Cañamero, our Investor Relations Director. Please let me remind you that the presentation will follow the slides that have been already uploaded to our website. Also, as always, we will have the usual question-and-answer session at the end of this presentation. First on slide number three, I will start by outlining the main update of the corporate reorganization. The extraordinary board of directors meeting held yesterday unanimously approved that in case this transaction should be approved, this will be done through a clear separation of Chilean activities from the rest of our business in Latin America on the well defined calendar that we will detail further on and treated as a unique operation. The transaction on the study ends to fulfill several objectives for Enersis. First of all to simplify the current complex corporate structure, providing customized industrial plans to distinct corporate profiles and facilitating decision making process and with focused management in each of the entities; secondly, to unlock value by one, increasing the visibility of certain business geographies, promoting a possible valuation re-rating in all the group companies and two, creating a streamlined corporate structure, eliminating holding discount valuation that is currently applied to Enersis and its affiliates; finally, to create differentiated equity stories allowing shareholders to have higher flexibility on their investments. Let me now focus your attention on a brief overview of the key figures of Enersis Chile and Enersis Americas in the following slide. If you think of Enersis Chile in the left hand side of the screen, Enersis Chile would be a pure Chilean integrated player, leader both in generation and distribution with installed capacity of approximately 6,500 megawatts and more than 1.7 million appliances. It would have a management exclusively focused on accountable for the results in this country, a dedicated investment plan with a strong pipeline of projects up to 3 gigawatts. And furthermore, given its high quality assets portfolio in generation and the stable Chilean regulatory framework in distribution, it is expected to have a robust and visible cash profile. In the case of Enersis Latin America, it would be one of the largest strategic players in Latin America, both in generation and distribution with an installed capacity of more than 10,500 megawatts and 13 million clients. Enersis America will be a unique and diversified platform prepared to capture the multiple investment opportunities that are emerging in the region. As far as growth plans for the region in generation, we have indentified new potential projects of approximately i3 gigawatts for the next year. In distribution, we will continue to add approximately 300,000 new customers per year. In next slide, maybe highlight the yesterday board of directors meeting have agreed by the unanimity of its members that the execution of any eventual reorganization of the company’s operations should be executed if and when approved by way of a separation of the generation and distribution activities in Chile from other activities conducted outside Chile by Enersis Group by means of the following corporate transactions. In the first step, it will be executed the spin-off of Chilectra, Endesa Chile and Enersis in order to separate the Chilean activities from those performed in other Latin American countries; in the second step, a merger of the Americas Holdings. Let me be more specific on next slide. As you can see in the right hand side of the slide, the transaction would result in two new Enersis, both listed in the same stock exchanges as the existing companies. And the post transaction side, Enersis Chile would be a pure Chilean player to manage the activities of electricity generation and distribution in Chile through Chilectra and Endesa Chile. While on the other Enersis Americas would be the Chilean investment vehicle grouping all Latin American participations of the group ex Chile. This would allow to have two distinctive groups focused by geographies. Before analyzing the time line of the process, let me explain you the main SVS requirements and suggestions in next slide number seven. Following Enersis consultation presented on May 15, SVS has answered to Enersis clarifying certain legal points and corporate governance suggestions related to the reorganization plan in particular SVS has showed that the reorganization, it has been structured, cannot be considered a related party transaction. The reorganization should be considered as a single transaction. Only the merger permits the use of the withdrawal rights for the dissident or not present shareholders. On the other hand, SVS reminded the board of directors its duty to preserve the interests for shareholders and to act in line with corporate interest. Also the board of directors has decided to us the independent directors committee to give an opinion on the transaction. The transaction that is under the study seeks to accommodate all the SVS requirements and suggestions also by accelerating the process in order to reduce the time between spin-off and merger so as to minimize all the possible uncertainty for each entire operation. And finally, let me explain the expected calendar for the transaction in next slide. As far as the timeline of the transaction is concerned, the execution is expected to last approximately 9 months from the board of directors to be held at the end of October 2015, summoning the first shareholders meeting. The calendar envisages two shareholder meetings, the first one in mid-December to approve the spinoff providing also an integrated exchange ratio for the future merger and the second one expected in the second quarter of 2016 to approve the merger. The entire process is expected to finalize in the third quarter of 2016. Let me now guide you through the rest of the presentation concentrated now in the first half of 2015 results. In slide number 10, moving on to the first half results, let me highlight the EBITDA surpassed $1.6 billion, increasing by about 8% compared with the same period of last year. This was obtained due to the positive contribution of both our distribution and our generation assets. Net income attributable to Enersis shareholders increased by 51%, reaching $463 million due to an adequate operational performance and lower financial expenses compared to last year. As a result of this, the earnings per share for the first half of the year was 5.87 Chilean pesos per share compared with 3.90 Chilean pesos per share of last year. Endesa Chile reviewed and defined yesterday the company’s product development portfolio, which reflects the new vision of the company with the focus on the sustainability of operations and creation of value for shareholders through various items

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Kazma Tanzachi [ph] with Bernstein Research. Your line is open.

[Unidentified Analyst:]

I have three quick questions. First of all, given the results that we are seeing in the H1 of this year, how confident are you to meet the original guidance of 3.7 billion euros by the end of 2015? And do you think that this will be due to a speed up in the growth of margin in H2? The second question regards to the Latin American footprint of Enersis. Clearly Enersis within Enel is a core area for the group in terms of growth. I was wondering if Enersis would be interacted in the potential acquisition of electro brass distribution companies in Brazil and why the company is not considering potentially the intervention in Isagen privatization during the year? And finally my question regards also the Chilean infrastructure plan. Clearly one of the core target of the Chilean energy policy is to increase the level of integration between the thick and thin system, even as soon as 2016. So which type of downward pressure on the wholesale price do you think this could create and that could be compatible with the plus 20% EBITDA increase that you forecast during the guidance for generation between 2015 and 2017? Thank you very much.

[Javier Galán:]

Yes. First of all related to your first question, yes we are confident enable to compare with the guidance even of $3.7 billion for the full year expecting better margins on recovery actions on the second part of the year. And related to your questions, related to Eletrobras [ph] is again while we are constantly working on identifying potential investments in the region although we cannot disclose any interest now on these assets. In terms of the interconnection we think -- we expect this inter connection to take place around 2015. And yes, we imagine that this interconnection will have on effect on reduction of price although we have a well-balanced and hedged production portfolio.

[Operator:]

And our next question comes from Louise Lite [ph] with Bank of America. Your line is open.

[Unidentified Analyst:]

I have two questions regarding the proposed restriction. So first, in which business or country do you see the best growth opportunities? And the second one is, do you already have an idea of how Enersis cash flow, cash from the previous capital increase will be shared the new two entities? Thank you.

[Javier Galán:]

Could you repeat your first question?

[Unidentified Analyst:]

First one is after the restructuring, in which business, so distribution or generation and which countries do you see the best growth opportunities in the region?

[Javier Galán:]

Yes, growth opportunities we see that we have both in Chile and in the rest of the region in Latin America. I said before, I think we have presented new pipeline on generation growth in Chile for 3 gigawatts as well as in the rest of Latin America of 3.3 gigawatt. And also we think that they are relevant opportunities and growth opportunities in both regions. In terms of your second question regarding how are we going to allocate the cash, I think we have not decided this.

[Operator:]

[Operator Instructions] We have a question from Susan Wisialko with GMO. Your line is open.

[Susan Wisialko:]

Can you please comment, I thought the local Chilean pension funds have proposed alternative structures regarding the asset redistribution for the company. Is the board of directors evaluating these proposals and can you comment on them? Thank you.

[Javier Galán:]

Yes, we are analyzing the structure that I commented to you in this presentation. This structure which is still on the analysis process, we are not contemplating any other structure at this moment and we have not been approached by any of the pension funds proposing a new structure.

[Operator:]

Our next question comes from Comes from Ezequiel Fernandez with Scotiabank. Your line is open.

[Ezequiel Fernandez:]

I have four questions, I apologize for length but they should be pretty quick. The first one is related to electricity consumption in Chile. Chilectra during the second quarter saw consumption per consumer drop 4% year-on-year. I wanted to know if there is any special thing going on there. The second question is related to if you expect an improvement in the Brazil distribution results during the second half of this year or is it too early to tell, considering especially the spot prices coming down as of late? Third, if you have any news about when could we have a resolution for Codensa on the target for the year? And the fourth question in the shareholder meeting that will both the spin-off and the merger of the reorganization plan, some shareholders will probably not vote the upfront et cetera. The vote that is not casted, does it count as positive for getting the two-thirds, are they excluded from the calculation or do they kind of as negative opinion?

[Javier Galán:]

I didn’t understand clearly your fourth question. Could you repeat it please?

[Ezequiel Fernandez:]

Yes, sure. In the shareholder meeting that will both the spin-off and the merger regarding your reorganization plan and Enel and Enersis need two thirds of the board’s to get it passed, some shareholders will probably be not present to issue their votes. So I wanted to know if a missing vote, does it count us positive to get the two thirds, if it’s excluded from the calculation. If it’s not clear, maybe I can follow-up with this after the earnings call.

[Javier Galán:]

On your first question, yes, we have had some decrease in demand on Chile, mainly due to a lower industrial consumption due to lower economy activities in the first semester of this year. And we have had also low residential consumption due to higher temperatures also in this period of time. Now we expect the mix overall of distribution business, we expect this to improve a little bit during the second part of the year. Regarding results in Brazil in distribution, I may say that we have good and positive results in Coelce with the new regulatory framework on the forward tariff cycle and a very good demand. And compared with Ampla in which we had more negative results, in Ampla we have had a reduction on demand of approximately a 3% during the period, combined with the third cycle on remuneration that is worse than the previous one. Now, we have also some delays on recoveries on the CVAs that we will some delay on the adjustment on prices but we expect to recover but Ampla this year will have -- we do not expect relevant recuperation of Ampla this year. Relating to Codensa I think that I said before our expectations is to have it resolved during the second half of the year. Approximately we expect this to be more close to the last quarter of the year. But we do not have any specific data in order to know when this is going to have this outcome. And your last question, the approval on the both shareholders meeting, it needs two thirds of the total capital of the company.

[Ezequiel Fernandez:]

Okay, thank you.

[Javier Galán:]

And Ezequiel, not the shares -- not questioned, cannot be used.

[Operator:]

Thank you. Our next question comes from Rodrigo Mora with Moneda Asset Management. Your line is open.

[Rodrigo Mora:]

I have a question related to Edesur on Brazilian distribution companies. Could you explain the financial revenues that the company reported during the second quarter please?

[Javier Galán:]

Yes, we have a reversal both in Ampla and Coelce due to some revaluation of assets from the IFRIC 12 resolution of approximately $100 million. And Edesur and Costanera, we have of approximately $50 million of combination of interests of that from Costanera.

[Rodrigo Mora:]

Wasn’t Edesur, only in Costanera, the $50 million?

[Javier Galán:]

Edesur and Costanera, $50 million…

[Rodrigo Mora:]

Okay. So, in Argentina it was $50 million and in Brazil it was $100 million due to Ampla process tariff or Ampla and Coelce.

[Javier Galán:]

Ampla and Coelce, yes. If compared with last year, we have also on effect related to Argentinean operations, we do not have this year the negative FX effect on the debt in Edesur and Costanera, one because it has been capitalized and the other one because it has been renegotiated [indiscernible] we had with recent issue. This effect is about $50 million.

[Rodrigo Mora:]

I have another question related to the forecast for the second half of the year in generation Chile. What do you expect in terms of rain or the production of the company, the facilities of the company?

[Javier Galán:]

Making about expectations about rain, I think it will difficult for me but I think July, last June and July has been experienced time in which we see some recovery on the levels of hydraulicity. And we expect that the long drought drop period that has been in Chile for the last years begins to reverse. So we cannot at this moment make expectations.

[Rodrigo Mora:]

And one last question San Isidro, one and two have facing problems with the lack of water. Does Endesa making some solution -- looking for some solution to supply of water both cycle combined?

[Javier Galán:]

Yes, we are having problems on the heating of these plants. We are operating on the close cycle and we are using some canyons in order to bring some water to cold the plant. So it is about $10 million cost for the first quarter, first half of this year.

[Operator:]

[Operator Instructions] And I’m showing no other questions in the queue. I would like to turn it back to Mr. Galán for any further remarks.

[Javier Galán:]

Thanks to you all. We don’t have any final remarks.

[Operator:]

Thank you, ladies and gentlemen for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.