Enel Américas S.A.
Q2 2013 Earnings Call Transcript

Published: 25 Jul 2013

[Operator:]

Good day ladies and gentlemen, and welcome to the First Half 2013 Enersis Earnings Conference Call. My name is Sue, and I will be your operator for today. 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 Enersis and its management with respect to, among other things, Enersis’ 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 applying this to Enersis or its affiliates. Such forward-looking statements reflect only on current expectations, are not guarantees of future performance and undue reliance on those forward-looking statements, which speak only as of their dates. And Enersis undertakes no obligation to update these forward-looking statements or to disclose any development as a result of which those forward-looking statements become inaccurate. I would now like to turn the presentation over to Mr. Eduardo Escaffi, Enersis' CFO. Please proceed.

[Eduardo Escaffi J.:]

Thanks Sue. Good morning ladies and gentlemen and welcome to our first half conference of 2013 results presentation. My name is Eduardo Escaffi, Enersis' Chief Financial Officer. With me today is Mr. (inaudible) who has just joined Enersis’ as our new Investor Relations Director, in the position previously held by Mr. Ricardo Alvial. Ricardo joined Enersis in 1994 and served as the Investor Relations and Risk officer since 2003. We thank Ricardo for his dedication, while running one of the oldest and recognized IR teams in the regions and we wished him the very best in his new activities. Remember that our conference call will be conducted, filing a presentation that has already been uploaded on our website. We would take your questions at the end of this conference call and our Investor Relations team will also be available to assist you with detailed information after this call. And now, let’s begin the presentation providing you some highlights for the period in slide number 2. During the first half of 2013, average electricity demand in the countries in which grew by 3.5% higher than the growth evidenced during the first quarter this year. As we see in the bottom slide, this growth has been even higher if we just analyze the regions in which our distribution companies are located. The lower hydro generation presented in our market has been faced through higher thermal production from the newly commissioned 350 megawatts Bocamina II plant in Southern Chile for 1.2 terrawatt hour during the period, which came on stream at the end of October 2012 and high combined-cycle turbine production in Brazil and Peru. This small bit electrified mix implied an EBITDA improvement in generation business of almost $60 million. Further more if we isolate the positive one-off effect registered in first half 2012 linked to the settlement of an agreement between Endesa Chile and CMPC, a pulp and paper company, which amounted for $60 million. The comparison between first half 2013 and first half 2012 leads to us to an increase of $120 million of or 12% increase. Total EBITDA of Enersis improved primarily because of some non-recurring other items in Sur $398 million, our distribution company in Argentina. General lower LNG cost and lower operating cost in connection with Bocamina II. Also regarding capital increase recently finalized, let me highlight that since the finalization of the deal in the March 28, the performance of Enersis stock price followed the Chilean IGPA Index evolution during the period. And second, that we are delivering undersize. The asset contribution from our parent company as part of the in-kind contribution and the sustain last year produced a net total income of $366 million. Now it is only three months of the consolidation inside Enersis. These stats are explaining $110 million. That’s showing the strength of the operation and which is more important than non-diluted effect from the very first moment. In that sense if we were leave out a long going effect associated with Sur, the EPS increases by 5% from Ch$1.9 trillion to Ch$1.99 per share for the quarter. In summary, the net income attributable to our shareholders grew 98%. Let’s now move to analyze the business context, which during the first half 2013, the slide number 3. As you can see in the upper part of this chart, electricity demand grew, growth has been positive in all the countries in which we operate. First half of 2013 in comparison to first half 2012 has been influenced by the absence of a leaf year a day and fewer working days as well as mild temperatures. Chile, Colombia and Peru continue to show an important demand growth in the range of 3% to 6%. Our distribution companies in this region have continued to perform well, in most cases with demand growth higher that of their respective countries. For example, products in Brazil grew about 9%, Chilectra in Chile, it was 5% and Codensa in Colombia by 3%. Our aggregate generation declined by 1.9% to 27.3 megawatts hour in the first half of 2013. This was the result of lower production at Argentina, Peru and Brazil. As far as the fourth market, Chile evidenced lower prices related to higher thermal production and Colombia and Peru revealed significant increases mainly attributable to their lower hydro production during this period. Let’s continue with an overview of some relevant financial highlights in the slide number four. EBITDA amounted to $2.3 billion or 16% higher than the first half of 2012. This is mainly the result of the increasing contribution of our Chilean, Colombian generation. Together, we have the positive non-recurring effect of our distribution business in Argentina (inaudible), which have been partially offset by the decrease in contribution of our distribution business in Brazil, Colombia and Peru. Net income amounted to $673 million or a 98% increase versus first half 2012 mainly as a result of the mentioned improvement in the EBITDA and lower depreciation and amortization recorded during the period, and the asset consolidation effect from the recent capital increase. Net operated income increased by 12% during the first half of 2013, also send to the capital increase, the weight of the parent company has increased from 42% in the first half of 2012 to 57% to the first half of 2013. Net debt during the first half of 2013 decreased by about $700 million to $4.8 billion, I will provide more details later on. Now moving to the slide number 5, EBITDA increased by 23%, thanks to the combined effect of higher EBITDA and lower depreciation and amortization deposits during the period. Our net financial expense amounted to $153 million, an improvement of $200 million versus last year, and the 61% positive variation is due to that following. First the lower interest expenses of $59 million mainly as a result of lower average net debt when compared with the first half of 2012, and a positive continuation of other item of CLP142 million mainly due to the higher financial income explained by the lower inflation during the first half of 2013 compared to the same period of 2012. Our average cost of gross debt in nominal terms was 8.1% lower compared to last year. Mainly explained by a lower inflation rate in Chile and lower interest rates in countries where we operate. Finally, our aggregate effective tax rate was 51.3% comparable to last years 30.6%. Let’s continue with an update on forward sales in slide number 6. I would like to highlight some key issues of our (inaudible) charge that we apply to our ordinary income. The commercial policy has been designed to minimize relative risk derived from hydrology. This is done through contracts of on adequate energy volume depending on market conditions on high reliability. I am considering requirements of our regulated and non-regulated lines. On the other hand, the startup of Bocamina II implied a more efficient coal-fired capacity necessary to contribute to contain cost in our Chilean metrics. We manage our fuel purchase under the lowest strategy starting optimization thereby helping to restrain price pressures and to reduce costs. We continue moving forward in more efficient contracted level in order to optimize margins and reduce risks. Currently we have contracted about 74% of power generations demand for the current year, and for the next year we have contracted about 68% of our estimated generation. Moving to the medium and long-term, 55% of our future generation has been committed through contract beyond five years and 19% has been commercialized through contracts with a term over ten years. Now let’s look at some regulatory updates in slide number 7. Regulation is the key consideration in the development of our activities, especially in the distribution business. I would like to mention these relevant factors for Enersis in the region. Starting with Argentina, Enersis registered a positive effect in Argentina, our distribution company that operates in Buenos Aires as sequence of resolution 250. This resolution applied to the main operatives in the system authorize among other things the compensation of the debt undertaken until February 2013 by the so called “Programme for the Rational Use of Electricity” PUREE in its Spanish acronym, with the credit arising from the recognition of the Cost Monitoring Mechanism, MMC in its Spanish acronym. For the period between May 2007, February 2013, rather resulted in increased EBITDA level of approximately $400 million and $290 million on the higher net income. Without a significant effect in cash flow by the cash and effect in cash flow. The excess credits with funded trust (Inaudible) constituted by the end of last November. The trust is intended to promote investments in the construction area. In generation, they have proved cost (Inaudible) scheme intends to better compensate generators in the following items. Fixed cost according to availability, variable cost of payments depending on size and technologies and finally additional compensation where a product is to be devoted to investments. The new compensation we’ve booked respectively as of February 2013. Moving to Brazil, the latest regulatory changes meant a reduction of energy costs in the country. Weighted on the decision of not to renew some higher transitions. These generated a temporary imbalance between the supply and demand of energy in the system creating an involuntary exposure to this book market of distribution companies. When marginal prices were very high due to the existing drop. After an unsuccessful extraordinary option, the Russian government decided to cover these losses using some nation treasury funds, CDE funds. Now let’s take a look to the other countries in the region in slide number 8. In Chile, the Congress has reached some agreements regarding probably related to non-conventional renewable energy sources and connection. In connection with non-conventional renewable energy, we already consider a goal of 20% of total production to be generated from sources such as wind, solar, mainly hydro and geothermal facilities as for 2025. Also the improvement in electrical constructions will accelerate the development of future projects for all the participants in the electric energy sector. Additionally, we’re under discussion in (inaudible) of the central, fixed and in northern connection of the Central fixed and (inaudible). These will increase the stability of the system national wide. Final as a solution for both bills, our expected price at the end of the current Presidential term us. Moving on to Brazil, on to Peru, the static review in our company is in progress according to the schedule. There was a report published in November. Finally in Columbia, the local regulator issued a resolution setting that general criteria for the next tariff review for the 2014-2018 period. I would like to review Enersis results on a country by country basis in slide number 9. Starting with Chile, during the first half and despite the lower hydro conditions linked to the persistent drought affecting the country, generation output increased by 1%, thanks to the higher thermal production from the newly commissioned coal-fired plant, Bocamina II. Distribution sales rose by 5% to 7.5 terawatt hour explained by the strong demand persisted in Santiago, (inaudible) concession area, supported by the activity of residential and commercial customers and the construction of new real estate projects. Generation EBITDA increased 17% to $199 million, explained by lower fuel costs mainly linked to the decrease in LNG prices and lower energy purchases, thanks to the better production mix explained by the interest of Bocamina II in October 2012. That was also positive one of effect registered in 2012 linked to the settlement of an agreement between Endesa Chile and CMPC, which amounted $60 million. Distribution EBITDA increased by 1%, reaching $179 million, thanks to the high physical sales and additional income linked to services. We’re partially offset by a lower regulated compensation after latest (inaudible). Now, let’s move to Brazil on slide number 10. Generation fell by 6% to 2.2 terawatt hour due to lower hydro generation from Cachoeira caused by the drought that has been affecting the country for the last few quarters in that region. [The ladder] was partially offset by a high thermal dispatch in Fortaleza. Distribution sales grew by 6% to 10.7 terawatts hour, mainly because of the 9% increase in Coelce boosted by higher energy consumption in the agriculture sector. Additionally, Ampla sales grew, volume grew 3% associated with the higher temperatures. Generation EBITDA decreases 11% to $189 million because of higher fuels cost and energy purchase for (inaudible) partially offset by higher thermal dispatch. Additionally, (inaudible) lowest sales volume during the year. EBITDA for the distribution business in the first half reached $409 million representing a decrease of 17% over the same period in 2012. This decrease is due to the extraordinary weather in costs include by the regulator by the distributors, in any case the amount of the additional cost non-compensated by our formation degree, we’ll be recovered in top tariff reviews next year. In Colombia generation was we are currently in the slide number 11, in Colombia generation was in line with the first half of 2012 reaching 6.3 gigawatts hour during the period hydrology was affected by lower rain fall. These effect was almost offset by a higher thermal dispatch particularly from coal-fired plants MMC plant. This divisions stays volume increased by 3.3% reaching 6.6 gigawatts hour, this is explained by the healthy energy demand that prevailed in the country during the period. Generation EBITDA increased 11% to $415 million thanks to higher prices in the spot market partially offset by higher fuel consumption and energy purchases. This division EBITDA decreased by 5.4% to $301 million during the period due to lower average sales price partially compensated by higher phase volumes and other services. Now let’s analyze slide number 12, energy output decreased by 5% reaching 215 gigawatts hour. This was explained by lowest thermal dispatch from fuel and gas facilities, which we have partially compensated by the recovery of our CCGT plant (inaudible), which in 2012 was under maintained. This division’s sale was 2.2% reaching 3.5 gigawatts hour. Thanks to the stable demand. Generation EBITDA slightly increased 1.2% to $152 million. The result is explained mainly by a decrease in procurement and services costs. Due to lower energy prices and fuel consumption costs, which were partially offset by lower operating revenues. This division EBITDA fell 4% to $95 million. This was mainly explained by the increase in procurement and services cost due to higher energy costs and a reduction in other operating revenues. And finally, let’s take a look to Argentina on slide number 13. Generation business experience at 4% reduction in energy output to 5.5 gigawatt hour, due to lower dispatch from Costanera linked to outages and lower hydrology impacting Chocón’s output. This was partially offset by (inaudible) one of the new assets consolidated by the Enersis after the completion of our latest capital increase, which increased its energy output compared to the same period of 2012. A slowdown in Argentina economy also reflecting lower energy demand grew growth in aerosol. These represent a no increase in sales, maintaining practically the same 8.7 terawatt hour sold during the accumulative period until June 2013. Generation of EBITDA that’s not yet include the possibility facts of new regulatory framework adopted for all generation based on cost plus scheme. Nevertheless, EBITDA experienced an increase of 26% mainly driven by the lower use of fuels. This division EBITDA was positively affected by the already mentioned resolution issued by the Argentina Secretary of Energy of almost $400 million. Before concluding with some final remarks let me explain you our net debt evolution during the period in the slide number 14. As of June 30 net debt EBITDA, net debt amounted about $5 billion recording a decrease of about $700 million versus final year 2012. This was mainly the result of the positive cash in contribution related to the Enersis energy capital increase of $2.4 billion and the cash flow generated from our continuing operations $1.4 billion. Our liquidity position amounts to about $4 billion and allows us to easily service debt maturities up to 2016. Please refer to the annexes for today. As mentioned in our financial statement our interest coverage ratio or the ratio of EBITDA to interest expenses is almost 4 times. We continue to hedge some of our flows as to better manage exchange rate increases. And finally, let me stress some topics in the slide number 15. For the current year, we have positive expectations. I would like to underline the very good result of rising from the assets contributed for the capital increase. The consolidation of these assets in our result from just one quarter has generated additional $110 million in net income for the group. On an annualized basis, this figure exceeds the $366 million estimated as the consequence of the in-kind contribution made by our controlling shareholders. We have been able to face the force (inaudible) mainly in Chile, thanks to the increased similar capacity from coming to and less expensive use of LNG. The more diversified mix implied and implied an EBITDA improvement in generation business of almost $60 million. EBITDA in generation is even better if we isolate the positive one-off registered in the first half of 2012 linked to the CNBC agreement, which amounted $60 million. In such case, the comparison between the first half 2013 and 2012 leads to an increase of $120 million or 12% increase. In all five countries in which we operate sound fundamental and the prospect of regulatory changes suggest that the slight slowdown evidenced during the first half 2013 should be transitory. In fact energy demand was higher than the economic growth confirming that the strength, the strength of our fundamental. Regulatory actions carried out in May 2013 led to a positive effect on our Argentinian distribution subsidiary as with doing the second quarter, which largely accounted for the improvement in EBITDA and net income at the consolidated level. A detailed analysis of all the information summarized here can be found in our press release or readily available on our webpage together with the full financial statements. Additionally, if you have a specific questions regarding the result of our businesses please contact our investor relations department. Thank you very much for your attention. And now, I’d like to pass the call to operator for your questions. Sue?

[Operator:]

Thank you. (Operator Instructions) Your first question comes from the line of Charles Fishman, Morningstar. Please go ahead.

[Charles J. Fishman:]

Thank you. At the beginning of the presentation, you made some comments about the EPS with and without the Cono Sur assets. Could you go over those again?

[Ignacio Antoñanzas:]

Yes, Charles, thank you. We isolated the EPS of the second quarter from the Sur effect. And the second quarter of last year, we had the 1.96 share, don’t forget that in that moment we had $32 billion shares and now since we have 50 billion shares, almost $50 million shares, the amount or the earnings per share it is in $1.99 then it is 5% increase not taking consideration the aerosol effect, and that shows that comes for the $110 million of extra income that comes from the asset that were incorporated into an NFC as the in time contribution of in the sustain during the capital increase.

[Charles J. Fishman:]

So this roughly 5% accretive impact, do you see that continuing on in the second half of the year. Eduardo Escaffi J. We don’t see any reason why it’s not going be that phases.

[Charles J. Fishman:]

Okay. And then the impact of the resolution in Argentina, at the one time affect. On a net income basis, what is that roughly?

[Eduardo Escaffi J.:]

Right. The point is following, the two accounts that comes from 2007 and 2013 one of them is money that was intended to remunerate us in consideration additional costs that we were having that MMC that’s making monitoring cost us that was in order to taking consideration the inflation. The other was the, it was sort of punishment for the more that use most more energy. It was a way to customers to rationalize the use of energy, and that’s big way, that was a sort of income that we were to collect. The government related made to all the distribution companies in our construction area while we were in the region which we are least affected also to the North. And the final effect is that we have a net trend of a almost $400 million, in terms of net income is a $293 million and there is a off the effect for us of an [FC] taking position that we own 71% of various suite, that roughly speaking $231 million that’s the final effect in our net income. Of that amount of that $398 million almost $100 million went to settle on accounts payable to commission. And that’s why I mentioned that even though it appears that this resolution doesn’t have a case effect, it does have, because the commission accounts payable was a when that we have to pay and now we don’t have to pay. We are not going to have an out flow of $100 million, then in net effect these debt we are not to going to have an outflow of $100 million.

[Charles J. Fishman:]

Okay, so if going for rest of the year, I mean we had one quater impact of the f Cono Sur assets, which will get for the rest of the year. And then there is one-time impact in Argentina that’s done that was roughly as you said, net income wise about $231 million. And basically, those were the unusual things that occurred in the first half. I mean, in the second counting hydro conditions and things like that just from a financial standpoint those were two one-off of unusual events there are going to now be normalized the benefit of the Cono Sur assets offset by the – and then loosing the effect of the one-time resolution, correct?

[Ignacio Antoñanzas:]

Well, let me correct that the effect is a one-time, it’s okay, but the $110 million Cono Sur assets is equal, because now we are going to have it for – those efforts are already in our pockets of problem assets. Then we are going to – we don’t know if they are going to deliver, could you deliver $110 million, but not yet, they collectively delivered $366 million.

[Charles J. Fishman:]

Okay. And then the effective tax rate for the rest of the year, do you think it’s – it will be consistent with the first half even with the additional derivatives the end time?

[Eduardo Escaffi J.:]

Yeah.

[Charles J. Fishman:]

Okay. And then on just last one on Slide 8, the new Congress Congressional agreement I guess in July that on the renewables? The way is to find the non-conventional renewables, does that include hydro or hydro or just 20%?

[Ignacio Antoñanzas:]

Mini hydro, mini hydro

[Charles J. Fishman:]

Okay.

[Ignacio Antoñanzas:]

Many hydro less than 20, and in some cases less than 40.

[Charles J. Fishman:]

Okay, so it does include like many hydro.

[Ignacio Antoñanzas:]

Yes, includes 20 and in some less than 40 megawatts.

[Charles J. Fishman:]

Thank you very much. That was very helpful.

[Ignacio Antoñanzas:]

Thank you, John.

[Operator:]

Thank you. (Operator Instructions). Your next question comes from the line of (inaudible). Your line is open. Please go ahead.

[Unidentified Analyst:]

Hi, my question is, could you tell me the reason why Endesa Brasil has not paid dividends in two years?

[Ignacio Antoñanzas:]

Hi, (inaudible). So far the, no that year we paid, we did pay I will check that, that this year since we are having the, this year we have a delay that the payment of dividends for Endesa Brasil. Because of the capital increase there are some factors of registration, conditions on the registration for Cono Sur of these assets, the capital increase incorporation of the assets for the capital increase it is tax efficient to end the registration that we are doing before paying the dividend, so we’re going to pay dividend as soon as we ended the rest of situation and we think that it is going to be before October.

[Unidentified Analyst:]

Okay.

[Ignacio Antoñanzas:]

We did pay dividend.

[Unidentified Analyst:]

Last year.

[Ignacio Antoñanzas:]

Yeah. I’ll send you the information.

[Unidentified Analyst:]

In the Chile, has to pay (inaudible) next month. What is the idea to (inaudible)?

[Ignacio Antoñanzas:]

Sorry, I’ve few of the information in this facility paid small amount of Ch$7 million at 2012.

[Unidentified Analyst:]

Ch$7 million to all owners or all the Enersis?

[Ignacio Antoñanzas:]

Not for Enersis. That’s for finances.

[Unidentified Analyst:]

Yeah, but in this Brazil, now in the sort of have Ch$638 million in cash and consolidated cash is Ch$877 million.

[Ignacio Antoñanzas:]

Yeah, what we that’s we intend to pay a dividend this year for where (inaudible) tradition of see it’s tax efficient.

[Unidentified Analyst:]

Meanwhile, what in this is going to do in the Chile?

[Ignacio Antoñanzas:]

It’s about the what we have seen a maturity well in two weeks more and this is going to pay the (inaudible) debt mature and they’re going to get the money from, I mean the company loan provided by agencies. We have the money, that’s part of the usual management of the company’s that we usually do, that’s very tax efficient and very – it’s a natural task management, we do with our company. We benefited a old company as a group and we have a very well old mechanism between Chilectra, Edesur and Enersis. This is very well explained in our management statements, and even it has been very well analyzed by the board, the director’s committee. This is the – and that is the most efficient way to pay this obligation. Endsea Chile is going to repay that obligation through Enersis before the end of the year.

[Unidentified Analyst:]

When and this Brazil, stay dealings, right?

[Ignacio Antoñanzas:]

Definitely.

[Unidentified Analyst:]

Because at this time, Endsea Chile has no money, right?

[Ignacio Antoñanzas:]

Yes.

[Unidentified Analyst:]

So, and this is waiting for the dividends from Brazil to pay Enersis, right?

[Ignacio Antoñanzas:]

Right. And this is part of the usual cash management that we do.

[Unidentified Analyst:]

Okay.

[Eduardo Escaffi J:]

If you think in consideration the tax– if you think that you can see that as a shareholder of Endesa – Endesa Chile, you can benefit from that and being a shareholder of Enersis, we benefit in both ways, being a shareholder of Endesa Chile and benefiting of putting our money in a very, I may say, very worthy and very risk rate company.

[Unidentified Analyst:]

This inter-company loan is going to be a market condition, right?

[Eduardo Escaffi J:]

Absolutely, without doubt, you can count to that, absolutely.

[Unidentified Analyst:]

Okay, thank you.

[Eduardo Escaffi J:]

(inaudible) condition that’s from absolutely without doubt.

[Unidentified Analyst:]

Okay, thank you. Thank you, Eduardo

[Operator:]

Thank you, and now, I would like to turn the call over to Eduardo for closing remarks.

[Eduardo Escaffi J:]

Well, then since there are no more questions, I would like to thank you for all for your kind attention. Remember that the IR team will be glad to help you in any further detail you may need. And have a nice afternoon, and thank you, goodbye. Thank you.

[Operator:]

Thank you. Thanks for you participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.