Enel Américas S.A.
Q4 2014 Earnings Call Transcript

Published: 30 Jan 2015

[Operator:]

Good day ladies and gentlemen, and welcome to the Year-End Results 2014 Enersis 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 Instructions] As a reminder, this conference is being recorded for replay purposes. 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’ billing plans, business plans, Enegrsis’ 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 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 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’s CFO. Please proceed.

[Pedro Canamero:]

Well, now, this is Pedro Canamero speaking, Head of Investor Relations of Enersis. First of all, good afternoon ladies and gentlemen and welcome to our full-year 2014 results conference call, which will be presented by our Chief Financial Officer, Mr. Javier Galan. Mr. Galan has been with Enel Group for three years and in Enersis for 20 years in various finance managerial roles. At the end of this presentation, which will be conducted following the slides that have been now uploaded to our website, we will of course have the usual Q&A session. Let me remind you that after the presentation, the IR team will be available to assist you with further detailed information. Thanks again. And now let me hand the call over to Mr. Javier Galan.

[Javier Galan:]

Thank you, Pedro, and good afternoon. I will start my outline in keys strategic achievements this year on next slide. First, let me start by saying that our EBITDA target for 2014 has been achieved surpassing US$4 billion. Let me also remind you that since October 23rd, Enersis has been controlled by Enel through its Spanish subsidiary, Endesa Latinoamérica. As a result of the reorganization of the group and the acquisition agreement approved in Endesa’s Spain shareholders meeting of October 21. Also as per the reorganization of the group, we have recently appointed all the relevant key executive officers including the new CEO of the group Mr. Luca D'Agnese. Furthermore, we are working on a new industrial day for Enersis, which will be presented to the market on the financial community during the second quarter of this year. Finally, we continue delivering the committed new capacity through El Quimbo hydro plant in Columbia and the Los Condores in Chile as well as investing approximately US$1 billion in minorities buy out during last year. I will now comment on the major highlights of the period in Slide number 3. Enersis operating cash flow during the period was US$3.7 billion. After investing in CapEx and paying taxes, the remaining free cash flow was US$1 billion. This has been possible trends to the good performance of the generation and distribution business. Regarding HidroAysén and Punta Alcalde projects, we are recognizing write-downs in its economic value. In the case of HidroAysén, in May 2014, the ministerial committee revoked the Environmental Qualification Resolution of the projects. In January 2015, the Chilean water authority denied the request of the additional water rights, needed to make the project valuable. As a consequence of this, the group has decided to make an adjustment as of December 31, 2014 recognizing an impairment of US$73 million. This decision was taken after analyzing the current situation of this project on the uncertainty of expected cash flows in the medium-term. However, the group will continue to defend all its rights related to the investments made so far and the importance of the hydro resources of the country. In the case of Punta Alcalde due to the uncertainty of the projects profitability in the medium term, the group has decided to stop the development of Punta Alcalde and the related transmission project. As a consequence of this decision, Enersis recognized an impairment impacting US$10 million in the net income. Also in this Chile reached an agreement with Consortium SES-TECNIMONT on the arbitration of Bocamina II, which began in October 2012. As a consequence of this agreement, Enersis will record a greater investment in its financials of a $125 million. In Argentina improvements in the conditions of Costanera debt after reaching an agreement with its main creditor led to a higher financial income of US$148 million. And finally, during the last quarter of the year, we sold ENEA non-core real estate asset in Chile for a total value of US$94 million. This transaction impacted group’s consolidated net income in US$31 million. Let me now begin with 2014 results explaining the business context in Slide number 5. As you can see in the upper left hand side of this slide, the average electricity demand growth in the countries in which we operate increased by 2.4%. The average growth of electricity demand in our distribution areas was even higher. Thanks to countries like Brazil and Chile, finishing the year with an overall increase of 3.1%. In the generation business, output increased by 0.4% to 60 terawatt-hours. Lower coal production was offset by higher hydro production mainly in Chile and in Colombia. As far as the spot market is concerned, we continue to be focused on the current reservoir levels in Brazil, which are below average capacity. As a consequence of this, prices in Brazil have been relatively high versus historical average during this year. In Colombia, the expected a linear effect in this country placed lower hydro levels, have increased prices in the spot market by about 20% compared with last year. In Chile, spot prices declined about 12% versus 2014 as a consequence of the relative higher rainfall recorded since May 2014. Let’s now continue with an overview of some relevant financial highlights in Slide number 6. EBITDA in 2014 amounted to US$4 billion, or 2.2% higher compared to the same period in 2015, mainly as a consequence of the recovery of Chile, Brazil, and Argentina during the fourth quarter of the year as well as the good performance of Columbia and Peru during the rest of the year. As a consequence of this, EBIT in 2014 increased by 1.6% amounting to US$3.1 billion. Let me now focus on the financial expenses on net income in more detail in next slide. Net financial expenses amounted to US$461 million, a US$166 million higher than the same period of last year. The variation is mainly explained by the following. A higher financial expense on debt for an amount of US$47 million as a result of higher rates and less financial income due to a lower cash position compared with 2013. Second, a worsening position in other financial charges not related with debt were US$120 million mainly as a result of higher non-recurrent net financial expenses in Brazil related with equity 12 for an amount of US$216 million partially compensated by the positive effect of Endesa Costanera debt renegotiation for US$148 million. Our average cost of debt during the period was 8.3% compared with 8.1% in 2013, as a result of higher inflation rates in Chile and higher interest rates in Colombia and Brazil. Total net debt in 2014 equaled US$3.16 billion or 0.8 times net debt-to-EBITDA. Taxes amounted to $871 million or 32.5% in 2014 in line with 2013 figures. Together with an impact of before mentioned write-downs, consolidated net income for the period amounted to $1.8 billion, 7.5% lower compared to 2015. Net income attributable to Enersis’s shareholders was $1.1 billion, or 12.43 Chilean pesos per share compared with 13.41 Chilean pesos per share in 2013. Before describing the evolution of EBITDA on a country by country basis, in the next few slides, I will give you a regional regulatory update. In Chile, effect of the tax reform already well-known. On January 6, 2015, the Congress approved a new law that modifies the mechanism of energy auctions are regulated customers of distribution companies. This reform was announced by the Energy Agenda in the Energy Agenda of the new government and intend to improve the conditions in generation and to promote a higher competition with more anticipation in the auctions longer term duration on energy contracts and more flexibility on the projects linked to these contracts. In Columbia, on December 23rd, the government approved a new tax reform beginning in 2015 and establishing first a tax wealth on growth for the next three years equal to 1.5%, 1% and 0.4% of liquid net worth respectively. Second a progressive increase in the fairness-tax from 9% to 18% in 2018 on a continuation of the financial transaction-tax of 0.4% until 2018. Also in 2014 to 2018 tariff review process in our distribution company Codensa has been performed and we expect the publication of the new tariffs during the second quarter of 2015. In Peru, on December 31, the government published a tax reform and promoting the economic growth, which implied a progressive reduction of income tax rate from the current 30% to 26% in 2019. In turn taxes on dividend will gradually increase from the current 4.1% to 9.3% in 2019. Regarding Brazil, next slide, since December 2014, our Brazilian distribution companies are able to account over-run distribution costs for the period directly to EBITDA, so called CVA mechanism implementation. Thanks to these distributors now allowed to book regulatory assets into their P&L [indiscernible] ways. Nevertheless, this does not change anything from cash perspective. Cash continue to rise later on after ANEEL adjusts ties accordingly. In conclusion, as a result of these, the EBITDA of our distribution companies received a positive impact of US$218 million equivalents to the tariff deficit accumulated during 2014. And the remaining deficit of 2015, as the CVAs our account receivable, this cash will be recovered for tariffs during the current year 2015 and 2016. Also from January 01, 2015, the electricity distribution tariffs will be adjusted on a monthly basis and no longer once per year, thanks to a new system based on flags representing short run costs. This will be combined with new range limit of maximum and minimum spot prices approved by the ANEEL on November 25th, which are currently between 30 and 388 reais per megawatt hour. Both measures are going to help offset the negative working capital experienced in the past. Moving to the distribution business in Argentina, it is important to highlight that between June and December 2014, our subsidiaries recovered US$254 million and recognized past costs also conversations with the government continue in order to reach an agreement on an Ampla tariff more adjusted to the real costs of the company. With this we’ll finish the regulatory update of our business. On the Slide 10, you will find a snapshot of our EBITDA country by country. As you can see here, EBITDA in local currency during 2014 increased in all the areas with the exception of Argentina, which had a lower contribution cost recognition compared with 2013. In particular during the fourth quarter of the year, we have been able to revert the negative EBITDA contribution of Chile and Brazil that has accumulated during the first nine months of 2014. In the case of Chile, this was due to the good performance of the generation activities and in the case of Brazil, as a result of the recovery of the distribution costs. Let me be more specific on this on a country by country basis, starting by Chile in next slide. Chilean EBITDA increased by 1.3% or US$12 million as a result of better contributions from the generation and distribution activities. The higher - high volatility of hydro on the full consolidation of GasAtacama since May has completely offset the negative impact of the temporary shutdown of Bocamina II during the year. As a result of this, EBITDA in generation increased by about 1.7%. In the distribution segment, our operations registered 3.9% increase in EBITDA mainly explained by the demand trend, which increased by 3.6% compared to 2.5% of the country demand, which suffered the deceleration of the industrial and commercial sector. The number of customers increased by more than 43,000 during the year, surpassing 1.7 million clients. Continue with Brazil in Slide number 13; EBITDA increased by 8.1% during the period. Excluding exchange effects, EBITDA increased by 2.3%. In particular EBITDA in the generation business decreased by 5.1%, or US$16 million, mainly due to the exposure of higher spot prices in Fortaleza. In distribution, EBITDA for the full-year increased by 15.6%, or $101 million, compared with 2015 mainly as a result of the change in the recognition of the current deficit accumulated during 2015 and 2014 and this is seek with an positive impact. Let me highlight that the number of customers, in our distribution companies in Brazil increased by 199,000 during 2014, surpassing 6.5 million clients with an average demand growth in our concession areas of 5.5%. Columbian activities, in next slide, showing EBITDA increased by 17.9% or $271 million and includes the positive foreign exchange impact translation effect of US$103 million. In particular, generation EBITDA increased by 23.1%. This result is explained by higher prices experienced in the market as a consequence of a forecasted drier year because of their linear effect combined with a better hydro production. Let me also remind you that during 2014, we have finished the optimization of the Salaco hydro plant, which added 145 megawatts of capacity. EBITDA in our distribution business carried out by our subsidiary Codensa increased by US$59 million or 11% as a result of the growth in residential consumption in Bogota, our concession area. Overall demand growth during the period was near 2.6%. During 2014, Codensa clients increased by 85,000, reaching nearly 2.8 million customers. Let’s now look at Peru on Slide number 14. Here Peruvian EBITDA increased by 18% or almost US$89 million including the positive impact of US$50 million in terms of currency exchange rate effects. Generation EBITDA increased by 24%, or US$71 million. This improvement is mainly explained by higher generation related to the addition of the 302 megawatt [indiscernible] thermal energy plant after the Enersis capital increase carried out in 2015 and the completion of 180 megawatts related to the set of the three year project coupled with higher prices resulting from a temporary lower capacity in the country during this period of time. Distribution EBITDA increased 9.5% or $18 million due to the good macroeconomic level activity in the country. With a demand growth in our concession area of 4.5% and the increase of tariffs equivalent to 1.3% registered in November 2013. Edelnor added 39,000 clients during 2014, reaching more than 1.3 million customers. And finally, Argentina in Slide number 15. Argentinean EBITDA decreased by US$315 million compared with 2015 figures. This is mainly explained by the unfavorable comparison with Edesur’s 2013 figures due to the fact that in 2013 had an extra recovery cost recognition for the last five years, and in 2014, only for one year. In particular, in local currency, generation EBITDA increased by 19% or US$22 million mainly related with positive effect of Resolution Number 529 of May 20, 2014, which enhances the fixed and variable costs remuneration for our generation companies. Total EBITDA for the period was US$141 million. On the other hand, distribution EBITDA decreased by US$325 million, mainly reflected the lower MMC cost recognition already mentioned. In any case, the accumulated negative results have improved since September 2014, thanks to the positive new cost recognition of October 9 and December 18 of a total amount of US$171 million. Let’s now move on to the cash flow analysis on Slide number 16. During 2014, group cash flow from operations amounted to $3.7 billion covering investments in maintenance and growth CapEx for US$1.9 billion and tax payments for $751 million generated. As a result of this, the free cash flow available was US$1.1 billion. Interests amounted $269 million, total dividends US$1.1 billion, and we finalized extraordinary operations for more than $900 million. Enersis continues to show a strong financial position. Our liquidity position amounts to US$3 billion and allow us to easily service our debt throughout 2016. On top of this, we have committed - committed credit lines for a total value of US$1.6 billion. Our current net debt position is US$3.1 billion equivalent to a net debt-to-EBITDA ratio of 0.8 times. Our average debt maturity is 6.3 years and the portion of fixed interest plus hedged on total gross debt represents 46%. Before beginning the Q&A session, let me finish this call by outlining the drivers, I consider most relevant in this period for the growth, in the last slide. As you have heard here today, Enersis has enabled to maintain a good result in the complex year. The combination of higher hydro generation in Chile compared to 2015, better prices in Peru and Colombia and regulatory recognitions in Brazil and Argentina have offset the lack of production in Bocamina II and the higher costs in Brazil due to the drought situation. Regarding the distribution business, Brazil is creating a solid regulatory framework capable of being more responsive to the sector needs. In Argentina, we are working in order to have a better cost recognition impacts. Our distribution customer continues to grow at a healthy rate and the number of clients obtained equaled 387,000, we now have more than 14.7 million clients in our concession areas. The company also continues to invest in new capacity through El Quimbo and Los Condores projects and we are doing our best to return Bocamina II operations as soon as possible. Finally, mainly repeat our commitments to utilizing the funds from the 2015 capital increase in ways that are more beneficial for our shareholders. Now, let me handover to the operator for the Q&A session. Mark?

[Operator:]

[Operator Instructions] Your first question comes from Javier Suarez from Mediobanca. Please proceed.

[Javier Suarez:]

Hello, good afternoon to everyone. This is Javier Suarez at Mediobanca. I have three questions. The first one is on Bocamina II in Chile. I just wanted to have the negative impact of the EBITDA that you have suffered during the year 2014. When is the plan expected to [indiscernible] operation? The second thing is on the regulatory update in Brazil. We have seen a significant recovery corresponding to the year 2013 and 2014. I just wanted to have your view on the possibility that they may have - I know there less Coelce tariff decrease in 2015 or with the regulatory review that we have seen, you are 100% sure that this is not going to happen again in the year 2015. And then the final question is on Argentina. We have seen obviously partial compensation that is not recognized in the full course of the activity, which is your expectation for 2015 or 2014. The question is slightly different there, what kind of compensation you could need to make the company to be in full recognition on the [indiscernible]? Many thanks.

[Javier Galan:]

Okay, thank you. Regarding your first question on Bocamina II, the impact on 2014 accounts is US$100 million negative. We are, as I said, working on having this plan available as soon as possible. Related to the regulatory update, yes, we have had good responsive reaction of the regulators in Brazil for 2014. We expect to have this same kind of dialogue in 2014 although we need to work this out. Related to the third question, related to Argentina, yes, compensation did not cover the full costs of the operation of the year, but so far we cannot give you any further details about what might happen in the future.

[Javier Suarez:]

Thank you.

[Operator:]

Your next question comes from Ezequiel Fernandez from Scotiabank.

[Ezequiel Fernandez:]

Hi, good day. Thank you taking you for taking my question. I wanted to get a bit of detail on Brazil in the distribution business. According to your presentation, [indiscernible] the fourth quarter impact on the Brazil number is $280 million positive. I imagine that this is recognition of something for the past two years. If I’m right about that, I would like to know, what is the impact related only to the fourth quarter regarding this and taking into account the difference in the spot price for 2015 and other things, what are you seeing for 2015 in this regard? Thank you.

[Javier Galan:]

Ezequiel, regarding the US$280 million recognition, US$250 recognition of extra costs for the period of 2014 and the rest is recognition of the previous year.

[Ezequiel Fernandez:]

Okay, got you. That’s useful. That’s all from my side. Thank you very much.

[Operator:]

Your next question comes from the line of Charles Fishman from Morningstar. Please proceed.

[Charles Fishman:]

Thank you, two questions. One is - is it still your practice, you won’t be giving EBITDA guidance for 2015 and the second question also relates to Slide 9. It sounds like in Brazil overall this was - what you would consider a positive development in the regulatory framework, in other words, you have generation and distribution. The increase in the lower limit of the spot price was a bigger benefit to Enersis than the reduction in the upper limit on the generation side. And also with respect to distribution I guess that tariff plan, which is point number two on your slide, the over-run cost, is that just for fuel in purchase power or is that for other cost that could have an over-run? Thank you.

[Javier Galan:]

Related to your first question, we will not give guidance on EBITDA. Regarding your second question about distribution, in Brazil, we think that the measures are both positive. Related to [Audio Dip] this will identify the costs in terms of the distributors and we will be able to recognize those costs and invoice them to the customers on a quicker way. So that will be the better of for us in terms of working capital needs.

[Charles Fishman:]

So will those costs include more than just fuel and purchase power, will that include like if you’re personnel costs are higher, will that be adjusted as well in the tariff immediately?

[Javier Galan:]

Yes, they will include also - including cost of fuel, purchase powers yes.

[Charles Fishman:]

Okay, thank you.

[Operator:]

There are no further questions in the queue at this time. We have a question from Nicolas Schild of Santander. Please proceed.

[Nicolas Schild:]

Hi, thank you for taking my question, sorry for insisting in the Argentinean topic. According to the newspapers in Argentina, the Edesur stated that the company is almost bankruptcy and [indiscernible] on the company and one more time saying that it could takeover the company. And all this is happening after the extreme temperature that’s going on right now in [indiscernible]. Do you think that this situation is similar to last year or should we be more concern about the possible takeover or from your operations in Argentina? Thank you.

[Javier Galan:]

Related to Argentina, in terms of growth, our distribution company is not bankrupt. Yes, we are - as I said on conversations with the government and regulators so that our costs are recognized according to the real costs. You may take into account that 2014 was a complex year because of the high temperatures from the beginning of the year and according to that a relevant amount of costs were recognized.

[Nicolas Schild:]

So the situation is not as fair as last year?

[Javier Galan:]

No, the situation is good. The situation is that conversations with government continue and cost recognition is being done on a regular basis. Now, the situation is not worse than last year.

[Nicolas Schild:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Andres Ossa from Credicrop Capital.

[Andres Ossa:]

Hi, thank you for taking my question. I just want to ask if you could give information regarding the progress of the - from the capital increase and what are your expectations for this year on this matter?

[Javier Galan:]

As you know Andres, we highlighted and we have been doing several operations during this year. We continually analyze opportunities and we cannot give you any additional information on this regard.

[Andres Ossa:]

Okay, thank you.

[Operator:]

There are no more questions in the queue.

[Javier Galan:]

Okay, since 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:]

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day.