Enel Américas S.A.
Q3 2013 Earnings Call Transcript

Published: 4 Nov 2013

[Operator:]

Good day ladies and gentlemen, and welcome to the Nine Months Period 2013 Enersis Earnings Conference Call. My name is Lisa and I’ll 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 otherwise, supervision and regulation of the electricity sector in Chile or otherwise, 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 otherwise, adverse decisions by government regulators in Chile or otherwise and other factors described in Enersis’ Annual Report 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. Eduardo Escaffi, Enersis’ CFO. Please proceed.

[Eduardo Escaffi Johnson:]

Thank you, Lisa. Good morning ladies and gentlemen and welcome to our nine months 2013 results presentation. My name is Eduardo Escaffi, Enersis’ Chief Financial Officer. Before we go to the beginning, let me remind you that our conference call will be conducted following a presentation that has been already uploaded on our website. Today, I am here with Pedro Cañamero, Enersis’ Investor Relations Director and his team, which will also be available to assist you with further detailed information after this call. Also as usual, I will take your questions at the end of this presentation. Now let’s begin the presentation providing you some highlights for the period on Slide #2. As of September, our pivotal net income increased by 77%, reaching about $1 billion and already represents close to 58% of total net income versus 42% in the same period last year. That incremental contribution is mainly explained by the good performance of EBITDA, which increased by more than 12% up to $3.3 billion during the period. This was mainly attained thanks to the positive results achieved after the hard regulatory efforts being performed by our regulatory division in Argentina, mostly generation and in distribution, and a more efficient generation mix mainly in Chile. And the in-kind contribution from our parent company, Endesa Spain during the capital increase finalized during the first quarter of 2013. In particular, the positive EBITDA evolution was a result of the important contribution of our distribution business, which then increased by almost 15% and continues to benefit from the growth of our customer base, expanding at a rate of more than 3% or 460,000 clients during the last 12 months and our generation performance, which increased by 11% compared to the same period last year, mainly thanks to the cost reduction linked to Bocamina II and lower LNG cost in a year that continues being drier than the average. Let’s now analyze the business conflict during this period in Slide #3. As you can see in the upper part, electricity demand growth has been positive in all the countries in which operate. Bear in mind that this period has been influenced by the absence of fewer working days as well as mild temperature. Regarding the generation output, the improvement during the third quarter allowed us to recover the same levels we had last year reaching 43 terawatt hours. This was mainly explained by higher thermal dispatch in Chile in turn mainly explained by Bocamina II, which has compensated lower hydro generation in the rest of the countries where we operate. As far as the spot market, the situation did not change dramatically versus the first half of the year, when Chile registered lower energy prices in connection with a better mix and lower fuel costs related to higher thermal production at a more efficient cost while Colombia and Brazil revealed significant increases due to a lower hydro production during this period. Let’s continue with an overview of some relevant financial highlights in Slide #4. Revenues decreased by 5%, mainly due to regulatory change in Argentina, which impacted both revenues and costs, thus not affecting EBITDA. Excluding Argentina effect coming from the resolution 95, revenues remained barely flat for the rest of the countries. Costs decreased by about 13%, mainly thanks to a more efficient generation mix mainly in Chile together with lower cost in Argentina and Brazil. As a result, EBITDA amounted to $3.3 billion or high 12 high percent compared to last year. This was mainly the result of the positive contribution of Chile, Argentina and Peru, partially offset by the decreasing contribution of Brazil, which has been affected by the exchange rate conversion from reals to Chilean pesos. Net income attributable to shareholders amounted to about $1 billion, equivalent to a 77% increase compared to the same period last year, mainly thanks to the improvement in the Chilean generation business, a better regulation in generation and distribution in Argentina and the in-kind contribution that permitted the consolidation of certain companies in Enersis after the recent capital increase. Now moving to the Slide #5; the EBIT increased by about 15% in line with the EBITDA. Our net financial expense amounted to $292 million, an improvement of about $190 million versus last year. This improvement was mainly the result of higher financial income of about $150 million, primarily as a result of the cash invested that was collected from the capital increase in the first quarter of 2013, as well as higher income in Edesur and on the other hand, the lower financial expenses of $50 million. Our average cost of gross debt in nominal terms was 8.2% a year, a decrease compared to last year’s of 8.9%. This was mainly explained by a lower inflation rate in Chile and lower interest rate in the countries where we operate. Finally, our aggregate effective tax rate was 29%, in line with the previous we registered in the same period last year. Let’s move to Slide #6, where since regulation is a key consideration in the development of our activities, especially in our distribution business. Regarding recent developments in Peru, let us highlight that on October 16, OSINERGMIN, the regulatory body in Peru published Resolution 203 establishing the distribution tariff for Edelnor, our distribution company there to be effective from November 13 to October 17. Under this resolution, the value added in distribution rate for our [indiscernible] subsidiary increases by 1.2%. In Brazil, delayed weather changes meant a deterioration of the energy remuneration in the country coming from the decision not to renew certain hydro constructions and the corresponding energy constructs, together with a general lower hydro availability. These generated a temporary imbalance between the supply and the demand of energy in the system creating an involuntary exposure to the spot market for distribution companies when marginal prices where very high due to prevailing drought. We expect that this extra cost will be recognized in the following months from 2014 onwards. In Chile, on October 14, the government passed The Law 20/25 promoting the development of non-conventional renewal energy sources in the country’s energy mix, stating that by 2025, 20% of the total output must be met by this sources. Meanwhile the electricity concession law passed on the same day is intended to facilitate the awarding of this electricity concession. In Argentina, the Resolution 95 published in March 26, established a new regulatory framework for the electricity generation based on a scheme which bases fixed and variable costs plus an additional remuneration. As a consequence, you will not recurring decrease in operating revenues and also an operating cost for our thermal subsidiary Costanera, booking only the margin in this case. I remind you that this measure will supply restrictively from February 2013. Finally, let’s recall that in Edesur, our Argentine distribution subsidiary, Enersis registered a positive effect pursuant to Resolution 2050. We recognized historical cost restrictive to May 2007. The latter resulted in increased EBITDA of $384 million and $330 million in higher net income. Let’s go to other countries and regions in Slide number #7. As you can see in this slide, nine months 2013 EBITDA in local currency increases in all the areas of presence except in Brazil, which remained fairly flat. Let’s go country-by-country, starting with Chile in the Slide #8. Despite the continuous and fair bit of rainfall condition in Chile, the generation segment EBITDA grew by 36%. This was the result of a greater thermal dispatch caused by the commencements of operations at Bocamina II power plant and a lower cost of LNG, which led to better margins. In the distribution segment our operations registered a 1% decrease in EBITDA mainly due to lower energy revenues as a result of lower average sale prices following the Company’s tariff review in effect as of November 2012. Electricity demand grew by 5% in our concession area while energy losses remained at 5.5%. Let’s move to our Brazilian operations on Slide #9. Our Brazilian operations continue to face the effect of local currency depreciation, which represented a decline of 10% in year-to-date result in Chilean pesos. In order to illustrate a severe consequences arising from the exchange effect in Chile, we have mentioned that just during third quarter local currency depreciated 4% against Chilean peso. Excluding this effect EBITDA in generation increased by about 2%, mainly driven by an increase of at Fortaleza plant due to a greater demand within the system. Distribution reduced and EBITDA decrease of about 2%, mainly due to the effect of the drought affecting Brazil, which increased energy cost incurred by distributors, increasing their exposure to the spot market. This extra cost could not be mildly compensated through a regulatory mechanism and are expected to be recovered in the future periods according to the Chilean regulation. Ampla benefited from reduced procurement and services cost and the number of customers increased by 90,000, reaching 3 million clients. Coelce reduced lower operating revenues due to a decline in average sale price following the tariff reduction that came effective in April 2012. In addition, we paid the restructured tariff decrease from April 2011 and to April 2012, more than offsetting a significant increase in physical phase under reduction in procurement and services cost. Let’s now move to Colombia on Slide #10. In the generation business EBITDA increased by more than 8% at better margins where only partially offset by lower output related to fewer rainfalls. In particular, the lower hydro generation compared to the same period of 2012 when heavy rainfalls were reduced in the country boosting output at the time, was partially offset by the higher thermal dispatch, especially from our coal-fired plant in [indiscernible]. All the above was compensated by higher sales prices, which more than balanced higher production cost from our thermal facilities. Regarding our distribution business, Codensa resisted a slight increase of about 1% in demand, mainly explained by the lower economic activities in our concession area, corresponding to [indiscernible]. It is important to mention the significant improvement of energy losses, which dropped from 7.6% to 7.2%, thanks to the effort undertaking by the Company in order to mitigate this effect. All in all, EBITDA in this business segment remained flat. Let’s look at Peru on Slide #11. In local currency the generation business slowed – and showed an increase of 9% in EBITDA. This includes revenues from the Piura subsidiary, a company that entered in the consolidation of Enersis following the capital increase. The latter was partially offset by reduced revenues in our subsidiary Edegel, mainly as a result of a 7% fall in physical energy sales on the expiration of some regulated customer contracts, plus a reduction in the average energy sales price. Distribution reported an increase of 11% in EBITDA, mainly explained by higher physical sales and other services, together with an improvement in Enersis loses which declined from 8.2% to 8.0%. Let’ now move to Argentina on Slide #12. In generation EBITDA increased by 4% mainly explained by the increase in Costanera’s margin, including the remuneration received by the combined cycle availability contract as a consequence of the aforementioned Resolution Number 95. As a consequence of it, you will have received a recurring decrease in operating revenues and also in operating profit of our thermal subsidiary. Our hydro subsidiary, Edegel showed a lower operating performance mainly as a consequence of the full in physical phase related to the low dispatch. In distribution, attributable EBITDA increased by around $295 million mainly reflecting the positive one-time effect persisted in the second quarter of $394 million coming from the aforementioned regulatory effect in Edesur. Let me remind you that on November 7, we’ll begin the preemptive price offering for the capital increase of Costanera and to restore the capital base of our subsidiary. Let’s now move to the cash flow analysis on Slide #13. In the first nine months of 2013, cash flow from operations amounted to $2.1 billion. This cash was fully employed during the period in CapEx amounting $1.1 billion where 67% was in Brazilian distribution and 43% in generation. Dividends for $0.8 billion which were up paid during the first and the second quarter of this year, and interest payments up to $0.2 billion. All in all, Enersis continue to show its strong financial position, our liquidity position amounts to about $4 billion and allows us to easily service debt maturities throughout 2016. Please refer to our annexes for further details.

[Pedro Cañamero:]

Thank you, very much for your time and we can open Q&A session and hand over to the operator, Elisa, please.

[Operator:]

(Operator Instructions) Your first question comes from the line of Alexandro. Please proceed.

[Unidentified Analyst:]

Hi, Eduardo. I have a question related to financial income this quarter. In first quarter it was – financial income of $180 million and this quarter about $100 million. Why did we see this drop and how will financial incomes coming up from capital increase funds were reflected in? Thank you.

[Eduardo Escaffi Johnson:]

Hi, Alexandro. Well, as you know we received $2.3 billion in our capital increase in March and the duly invested in Chilean pesos and the average of 5.6% in Chilean Pesos that’s you can have that $150 million roughly speaking. The other part of the financial expenses comes from less financial costs because of the lower interest rate that we are paying because of the lower inflation rate. And also we have some the financial income that comes from as soon also because with the resolution they paid the bills that they had with Conosur. And that’s why we have – that’s very important increase in this financial expense line.

[Pedro Cañamero:]

Sorry about the financial income – growth and [indiscernible] 2001 quarters and we expect that with some sense comfortable increase, this line [indiscernible].

[Unidentified Analyst:]

Sorry, I couldn’t hear you. Please, repeat again.

[Eduardo Escaffi Johnson:]

Hello. And in first quarter financial income were about $100 million and second quarter it was higher level due to impart this Argentinean incomes, but this quarter we saw level similar to those of first quarter and there is no claims due to capital increase funds.

[Eduardo Escaffi Johnson:]

The capital increase funds, it represents roughly speaking $100 million in this period. The Edesur comes in, you’re right just in the second quarter, in fact in the year non-recurrent. We are going to see the other $100 million. As I mentioned before, you have to take in consideration the $2.3 million and the EBITDA of 5.5%, 5.6% a year, that’s the recurrent one.

[Unidentified Analyst:]

Okay, thank you very much.

[Operator:]

Your next question comes from the line of Ezequiel Fernández with Scotia Bank. Please proceed.

[Ezequiel Fernández:]

Hi everybody, thank you for taking my questions. Congratulations on the results. I want to ask you three questions. First, I wanted to know the EBITDA jump in the third quarter for the through the Peruvian distribution unit, what was related to. The second one, how do you expect to read the pace of recognition for your Brazilian distribution units in terms of the higher costs due to the drought? And third one is, what would you need to happen or what is missing for you to decide to make an effort for minorities listed in other LatAm exchanges apart from San Diego like [indiscernible]? Thank you very much.

[Eduardo Escaffi Johnson:]

Right, thank you. Well, let’s begin with the first one. As you know that our companies were impacted because of the – there was a perfect storm coming, the companies had to go to the spot market in the moment in which the spot market was – the prices were very, very high. The regulator recognized some parts this year and some parts is going to be recognized next year and we expect that we are going to restrict to recover all the difference during the next year. Then we recognized roughly half of the cost this year. And if you’re taking consideration what’s happening with our companies, Coelce and Ampla, they are less effective than our peers in a way the regulator is very worried about the situation of other companies. If you’re taking consideration the financial health of electrographs companies, so they are in a very – with some problems. Then in a way we expect that the regulation is going to comply with the recovery of all the extra cost that we had in this involuntary portion to the spot market. In terms of the minority interest and other M&A operations that we are going to – that’s our purchasing orders to stated budgeting for our capital increase. The use of funds of our capital increase as you can imagine if we say that we’re going to go after one company. The prices of those shares are going to jump in early. That’s exactly what happens immediately after the announcement of the capital increase. At some point the prices of some of the shares that are the natural targets of our company jumped up to almost 6% above the undisturbed price. And now all of them have been descending to more towards of course another level. Then it is very important for you as investor that we have to act in a very responsible way and not to be stating, which are the targets and how we are going to do. Then I ask you to be patient as we had been and this patience has brought lots of results in terms of the – today our purchasing power is almost 20% higher than the one that we had after the capital increase ended and which was – sorry the situation or the…. Well, so your first question about how why the distribution was so jumped 15%, well most of that situation is attributable to our and is sure one time effect that the government regulator is recognized the extra cost that the – our company was – not all company, only our company but also get the rest of the sector – the rest of our peers had since 2007, recognizing the extra cost that we had. That is related to the Resolution 250 that was in May, approved in May and that’s a one-time effect. And it’s interesting because even though it seems that it has no cash flow effect, it does have because with that they recognized at some debts that we already had with Codensa they were compensated with that recognition. Since we are one of those companies that we pay our bills, that money is not going to go out of the Company. Then that affects, as I mentioned before it was $380 million one-time effect was the most important effect that explains the 50%. Otherwise we see our distribution size has been behaving as a distribution business they should be, a very stable cost conscious business in which we are able to struck value from producing losses and the growing base of customers that comes into our business as the economies are growing. Let’s say 5% from 4% to 5%, a year.

[Ezequiel Fernández:]

Okay, thank you very much.

[Operator:]

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

[Charles J. Fishman:]

Thank you. The tariff increase in Peru, it’s a 1.2% revenue increase, am I reading that properly.

[Eduardo Escaffi Johnson:]

Yes. This is the VAD, a valor agregado de distribución that’s the value-added. As a short explanation, we every four to five years we enter into a discussion with the regulator to the tariff revision in which the regulator look after which are the asset base that we have to have in order to bring to our customers a service that is intended in terms of the regulatory framework. After the discussion they remunerate us and in this case in consideration of the latest tariffs that we had, we had a 1.2% increase. That’s mainly based on the asset base and that we were able to show that it is needed in order to keep the service that is required in our concession area. That will represent roughly speaking $2.5 million per year of extra EBITDA.

[Charles J. Fishman:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of [indiscernible] with CHG. Please proceed.

[Unidentified Analyst:]

My question is regarding with the distribution companies in Brazil. I would like to know the amount this extra cost have been registered this year like how much is it going to be in the total year.

[Eduardo Escaffi Johnson:]

Right, roughly speaking we are talking about $65 million next year. That roughly speaking, this needs a more, more precise calculation, but roughly speaking $65 million was the amount of tariff review of extra cost that has to be incorporated in tariff next year.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

(Operator Instructions) Your next question comes from the line of Alex Vigil with Cygnus. Please proceed.

[Alejandro Vigil:]

Hello, I’m Alejandro Vigil from Cygnus Asset Management. Just Eduardo a question about the outlook for the next quarter and for next year, looking particularly to consensus numbers that is a very wide range of estimates probably in the range of 30% from bottom to top, if you can help us to understand the key trends for Enersis looking into next year? Thank you?

[Eduardo Escaffi Johnson:]

Well, actually we don’t give forecast but in terms of the main driver for generation hydrology is the key issue, but as you saw this year, even though we are experiencing a very dry condition almost very similar to this year, we were able to extract value from the generation mix, that’s the cost of provision with coal and our LNG contract provides us a very interesting margin, that if conditions are similar to next year, it is reasonable to see that we can extract the same value, but if the condition, hydro condition resumes to long-term trends, that means that we can have a normal year. Currently, I have to remember you that currently we have a surplus probability of 75%, 72% that’s rather dry. But if we go to 50%, we are going to replace those even cheap by another extent, let’s say generation cost of coal and gas, but water that is even cheaper. Then the margin can improve dramatically. That’s what we can expect in Chile in terms of generation. The same can be said in the other countries in which we are, but in terms of distribution, you can’t find dramatic changes. As I mentioned before, the only dramatic change, ‘that you are going to find us that probably, we are not going to find again a Edesur one-time effect, but since you see that we are pursuing reducing cost, reducing losses, our distribution base is growing, you can see that the growth is sustained over time, but we don’t see dramatic changes over time.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

There are no additional questions. I’d now like to turn the presentation back over to Mr. Eduardo Escaffi.

[Eduardo Escaffi Johnson:]

Thank you, Elisa. Well and since there are no more questions, I would like to thank you all for your time and attention. Remember that our Investor Relations team will be glad to assist you in any further questions you may have. Have a nice afternoon, and goodbye. Thank you.

[Operator:]

This concludes the presentation. You may now disconnect. Have a great day.