Enel SpA
Q2 2015 Earnings Call Transcript

Published: 31 Jul 2015

Executives:

Elisabetta Ghezzi - Investor Relations Francesco Starace - Chief Executive Officer Alberto de Paoli - Chief Financial Officer
Analysts:

Lawson Steele - Berenberg Bank Javier Suarez - Mediobanca Harry Wyburd - Bank of America Merrill Lynch Anna Maria Scaglia - Morgan Stanley Enrico Bartoli - MainFirst Cosma Panzacchi - Bernstein Manuel Palomo - Exane BNP Paribas Alberto Gandolfi - UBS Javier Garrido - JPMorgan Antonella Bianchessi - Citigroup Zach Mecelis - Covalis Capital Alberto Ponti - Societe Generale
Operator:

Good morning, ladies and gentlemen, and welcome to our First Half 2015 Results Presentation, which will be presented by the CEO, Francesco Starace, and by the CFO, Alberto de Paoli. We will of course have the usual Q&A session at the end which will be open to those who are connected both on the call and on the web. Before we start, let me also remind you that the media listen to both the presentation and the Q&A session. Thank you again. And now let me hand over to Francesco Starace.
Francesco Starace:

Good morning, ladies and gentlemen. Let me start with reminding everyone that we recorded the period of a very resilient performance of EBITDA, thanks to the strong recovery in Latin America, the ongoing positive results in the retail business in Italy, a very resilient operation in Iberia and a very good performance in renewables. As a second point, interim results confirm that Latin America and renewables are our main areas of industrial growth. On top of this, in Latin America, I also remind you that we have Bocamina 2, a 350-megawatt coal plant up and running since July 2. And we are working to finalize the hydro project in El Quimbo in Colombia, it’s a 400-megawatt plant, which will be completed during the second part of this year. Since June 30, we are filling up the reservoir of El Quimbo, which is now at 95% completion. So the lake is there. In the renewable business, we have already addressed over 60% of the growth, providing high visibility on future additions. For 2015, beside the 300 megawatts that have entered into operation during the first half, we expect to add approximately 200 megawatts during the third quarter, fully in Latin America, and in wind over 350 megawatts during the fourth quarter. In Latin America, on July 20, the Chilean authority, SVS, has answered to Enersis, clarifying certain legal points and corporate governance suggestions related to the reorganization plan. On July 27, the Board of Directors of Enersis, Endesa Chile and Chilectra have outlined in more details the reorganization of the corporate structure. The transaction proposed not only complies with the SVS requirements, but also accelerates the process by reducing the time between the necessary spin-offs and mergers, minimizing possible uncertainties. Fourth, on efficiencies, we have succeeded to fully offset with savings the impact from additional capacity for growth and inflation, keeping our operating costs, OpEx, broadly flat in nominal terms. This group reorganization implemented last year is leading towards a higher focus on cash flow generation. We have seen in this period clear signs of improvement in the free cash flow from operations, which has allowed us to approach the net debt target of year end despite material negative impact of the foreign exchange, euro/dollar foreign exchange. Now let’s look at the operational highlights. We are now on the following slide, slide number 2. Total installed capacity declined to 89,000 megawatts. This follows the closure of more than 7,000 megawatts, at least 6,000 of them being in Italy, the plants that we are taking off the grid, mainly in Italy, where we have already closed more than 60% of the total 13,000 megawatt closure program. This is a program that we have announced at the beginning of this year. We registered an increase in the net production, mainly in Iberia and in the renewable business. As a consequence, the group load factor further increased to 37% in the first half of 2015 from comparing with a 33% which was the first half of 2014. In the distribution business, total electricity distributed increased by 1%, with significant increases in all geographies except for Italy. We have added in this period 300,000 end users in Latin America. We expect to reach – this number to reach about 0.5 million figure at the end of this year. And we have added around 800,000 digital meters in Spain and Brazil. In the retail business, we added about 400,000 free power customers in Europe, mainly in Italy. Now let’s move to the first-half group financial figures, so we move to slide number 3. In the second quarter of the year, we recorded positive and very strong results. Our first half 2015 EBITDA rose 2%, mainly thanks to the strong recovery in Iberia, Latin America and a continuing good performance of our renewable business that offset the expected worsening performance in the Italian generation and network businesses. The group net income rose by 10% to €1.8 billion. Group net debt increased about €2.5 billion and this is almost fully due to the negative exchange rate euro/dollar, which accounts to about €1.3 billion. We would like now to update you on the delivery on the strategic plan announced in March this year. So we turn to page number 4. We have defined the strategic pillars, three things. The first is operational efficiency. Operational efficiency will fuel additional development, innovation and new business ideas. The second is industrial growth. A technology focused and geographically diversified growth, much more granular and flexible in its modulation over the years. Third is portfolio management, with a minimum asset rotation that would inject a healthy tension in the way our units operate and also to adapt to synergy evolutions. The following slides show you the achievements of the period. First of all, on efficiency program, we have succeeded to offset the additional costs that would come from additional capacity, so growth and inflation. And Alberto will explain you this later. On industrial growth, we have secured the 2015 EBITDA growth already. 60% of our target of growth EBITDA for 2017 is also already secured, thanks to a bulk of total assets in execution of about €7.8 billion worth of investment, which is about 40% of the total growth CapEx plan. As for active portfolio management, on the disposal side, we have received two final binding offers for Slovenske Elektrarne. Negotiations are ongoing. We expect to finalize the transaction agreement by year end. As far as Latin America restructuring is concerned, the Board of Directors of Chilean companies have agreed, by unanimity of its members, that the execution of any possible organization in the company operations should be executed in a way that would separate activities in Chile from all other activities outside of Chile at the level of Enersis Group by means of a corporate transaction that I will explain you in detail later on. Alberto will focus on the efficiency later; now let’s start to look at the industrial growth. The key figures on the slide that you see, on page number 5, summarize the infrastructures that we have added in the period. We are progressing in all the business drivers which underpin our strategic plan. They are, first of all, renewable capacity addition. We almost doubled total assets under construction from about 950 megawatts which were under construction at this stage last year, to about 1.8 gigawatts today. Number of customers in Latin America increased by about 300,000 in these six months. 760,000 digital meters have been installed in the period in Spain and Brazil. Increased the number of free power and gas customers in Italy mainly of about 400,000. And on conventional generation, we, as I said, connected and started up Bocamina 2, which is a 350-megawatt coal plant in Chile. This is working now since July 2. And Quimbo, the hydro project that we had in construction in Colombia for 100 megawatt hydro will come online the second part of the year. Moreover, we have revised in detail the project pipeline in conventional generation. Now, we have a new and refocused pipeline of medium-sized projects, covered by potential PPAs with a shorter time to EBITDA, cutting this from more than four years to three years. We have held 18 screening committees in the first half of 2015. We have abandoned 7,000 megawatts worth of potential projects. We have added 6,000 megawatts of different projects, mostly in Latin America. And this is a big change in the pipeline nature and content. And we will make further assessment in the second half of 2015. Let us now dive more in detail in the following charts that get to explain these things a little bit more in depth. We are progressing on industrial growth in line with the announced following criteria that are basically no merchant exposure for future projects, higher flexibility in optionality and shorter time to EBITDA. So with the exception of conventional generation projects that are ongoing, El Quimbo in particular, all other projects have time to EBITDA lower than two years. CapEx related to projects completed in execution is about €7.8 billion. This would mean that we have covered about 40% of our growth CapEx plan which was, if you remember, €18 billion in the five years, and that gives us a lot of visibility on our growth going forward. €1.7 billion of growth CapEx have already been accrued in the first half of 2015. This is, for your record, about a 30% increase year on year. They include €600 billion of assets in operation, so they became already producing plants which refer to the projects already completed in the first half 2015 that I have described in slide number 5. Total projects completed in execution consist of the following. Like I said, €600 million in operations mentioned above. €7.2 billion of assets in execution corresponding to €5.5 billion of investment in renewable and conventional generation which will give us additional 3.3 gigawatts, 70% of which have commercial operation dates by year end 2016. €1.7 billion of those €7.2 billion are related to distribution growth projects related to quality improvements, smart meters, reduction of network losses and connection to additional end users during the second half of 2015. What does this mean in terms of returns on capital and growth EBITDA? We are quite well on track on the delivery of our investment plan in terms of growth EBITDA. We have achieved about 40% of our yearly target of about €400 million in line with our guidance given back in March that here we confirm. What we have in operation so far and all the projects in execution that we have announced before will drive us to achieve the 2015 target and address about 60% of the €1.3 billion target of growth EBITDA by 2017. I remind you that we have more than 2,000 megawatts including renewables in El Quimbo under construction which have a COD date, a commercial operation date of 2016. We are well on track on value creation target. Returns calculated at commercial operation date on projects already entered in operation on first half 2015 have about 250 basis point, 300 basis point spread over project WACC. Projects under execution are above the minimum threshold of 200 basis points over projected WACC. Now, let’s go the portfolio optimization part of the strategy. We plan to recycle about €5 billion of capital, which will be composed of about €2 billion of projects that are under execution. That means transactions that are in this moment being completed. This is about 40% completed. The dilution in EBITDA terms in our P&L is so far not material. As far as Slovenske Elektrarne is concerned, let me give you a little bit of an update. We have received two binding offers so far. We have another bidder still working to submitting additional bid. Negotiations are ongoing. We expect to finalize the transaction agreement by year end. Agreement framework is an equity sale in a two-stage process. First, we will sell a minority stake by year end in a way that we will not have the sole control of the company any longer and we will therefore fully deconsolidate the assets from the balance sheet and the profit and loss statement. Second, we will sell the remaining interest upon completion of construction of the two nuclear units, which are currently at the final stages of construction. And we will expect to become operational in – the first unit by end of 2017, the second one at the beginning of 2018. In the next stage, we are going to select the preferred bidder. We will then start the final negotiations with this party and we expect to reach the binding agreement by year end, according to the framework that I have just described. The binding offers that we have received are aligned with this process. Then the other additional €2 billion of assets that we have already identified in this cluster we have today under execution and therefore under transaction following disposals, a portfolio of renewable assets in Portugal including ENEOP, this is our joint venture in Portugal; Gas upstream operations; Hydro Dolomiti Energi; our presence in France; and our asset in Belgium. As far as the AGP assets in Portugal are concerned, they include the ENEOP quota of the joint venture. We have seen a strong interest for these assets. We have more than 10 non-binding offers. Binding offers are expected by the end of August. On the right side, we have no material cash out in the period so far. Let me now give you some update on how we are moving forward in Latin America as far as the reorganization is concerned. On July 20, Chilean authority SVS has responded to Enersis, clarifying certain legal points and corporate governance suggestions related to the reorganization plan. In particular, this response has indicated that the reorganization as it has been proposed and structured cannot be considered as a related party transaction. The reorganization should be considered as a single transaction, not as a sequence of two different transactions. The extraordinary Board of Directors that we have just held on July 27 approved in unanimity that in case this transaction should be approved, this will be done through a clear separation of Chilean activities from the rest, treating as a unique transaction and under a well defined calendar that I will now detail. First step, we will execute a spin-off of Chilectra, Endesa Chile and Enersis in order to separate the Chilean activities from those performed in other Latin American countries. And in a second step, we will merge all the holding companies that are holding participations in countries outside of Chile. We will unlock value by increasing the visibility of separated businesses and geographies, promoting a possible value relating in all group companies. And we have seen this happening in the past so in the case of Endesa for example. We will create a streamlined corporate structure eliminating a holding discount valuation that is currently applied to Enersis. Finally, we will create differentiated equity stories allowing shareholders to have a higher flexibility in their investment. The transaction that is under study seeks to accommodate all the requirements of the SVS which have also suggested a few recommendations. And it will also accelerate the process in order to reduce the time between the spin-offs and the mergers, minimizing all the possible uncertainties for the entire completion. Let me focus your attention on a brief overview of the key figures of the Enersis Chile and Enersis Americas in the following chart. So what would surface after this process is completed? Enersis Chile would be a pure Chilean integrated player. It would be the leader both in generation and distribution in the country with an installed capacity of 6,400 megawatts more than 1.7 million end users in distribution. It would have a management focused exclusively and responsible for this country in a customized investment plan with a strong pipeline of projects up to 3,000 megawatts. Furthermore, given its high quality assets portfolio in generation in a stable Chilean regulatory framework distribution, it is expected to see Enersis Chile to have a stable and very visible cash flow profile. Different story in Enersis Americas, and we call it Enersis Latin America. It would be one of the largest utility players in Latin America both in generation and distribution with an installed capacity of more than 10,500 megawatts and 13 million customers. Enersis Americas will be the investment platform to undertake a relevant growth plan and capture the multiple investment opportunities that are emerging in the Latin America region. As far as its growth plan is concerned, in the next month, we will update our group strategic plan by including new CapEx plan for both region, Chile and Latin America, which currently amounts for €9 billion, of which €4.2 billion are only for growth. As far as the growth plan is concerned, here the group will count with new projects surpassing 3,000 megawatts for the next years. Let me now explain a little bit in detail the timeline of this transaction. Execution is expected to last approximately nine months from the Board of Directors that will be held at the end of October 2015. This will call for the first AGMs. The calendar envisages two general meetings. The first one will be in mid-December to approve the spin-off providing also an indicative exchange ratio for the future merger. And the second meeting will be the one expected in the second quarter of 2016 that would then approve the merger of the three companies in, abroad from Chile. The entire process is expected to be finalized in the third quarter of 2016. To conclude, this is a very exciting step for ENEL. We finally have the potential to unlock significant value for our group in this very important part of the world, which is Latin America. Now let me hand over to Alberto for some more detail on this good first half of 2015. Alberto?
Alberto de Paoli:

Thank you. Good morning, ladies and gentlemen. Before entering the financials, I’ll give you some highlights on the market context in which we operate. During first half 2015, we have seen a power demand scenario which although generally worse than expected mainly in LATAM lead us to think that recession phase is close to the end. More specifically in Italy, the economic outlook is improving. This year for the first time since 2011, the GDP is expected to increase. And economic activity should strengthen next year where the GDP should climb by more than 1%. The recovery in power demand in the country is still weak. But the trend switched from negative to stable. Moreover, as far as power prices are concerned, we registered as of first half 2015 an average spot price in the region of €0.50 megawatt/hour, almost flat year on year, but higher than our expectations for the full year equal to €0.47. We are also currently noticing increasing trend in the spot prices. CAL15 stands above €0.50 megawatt/hour, again higher of our expectations. Finally, due to the exceptional heat, the average basic price in the month of July was higher than €0.67 megawatt/hour. And some old thermal plants have been called by the system operator to cover the demand. In Spain, electricity demand continues recording a positive trend. Mainly demand growth is driven not only by strong industrial activity, but by the residential segment as well. Both the Spanish government and the IMF increased significantly its GDP growth estimates for 2015 from 2.9% to 3.3% and from 2.5% to 3.1%, respectively. This first semester was also characterized by the normalization of the exceptional hydro contribution recorded during the first semester of 2014, which has led to a 50% increase in the thermal gap. As a result, wholesale electricity prices stood at €0.48 megawatt/hour or 52% increase year on year, while the balance 2015 is at a level above €0.52 megawatt/hour, higher than the current 2016 forward curve electricity price in Spain. Finally, LATAM showed a robust growth in electricity demand. Indeed, we recorded healthy 2.5% demand growth in the countries in which we operate, together with prices almost flat in Chile and with a level in the other countries lower than the last year due to better hydro conditions and lower commodities, but above our expectation for 2015. Now let’s have a quick update on forward sales. In Italy, we are about 50% hedged for 2016 production, 14 basis points more than the end of first quarter 2015 at about €0.48 megawatt/hour higher than €0.47 as of the end of first quarter. Level of forward sales is almost in line with the previous year. And as for 2016, we have hedged at €0.48 megawatt/hour which is lower than our business plan assumptions, but thanks to better hedging of the procurement contracts we have reached the same dark spreads versus our previous assumptions. As for hedging strategy, we have almost securitized most of our coal production while we are now starting to cover the hydro and CCGT portion as we see prices now in the market improving. In Spain, we are fully hedged for 2015 and above 25% for 2016 at an average price of €0.58 megawatt/hour in 2015 and €0.56 in 2016. It is worth mentioning the strong price signals set by [balance] 2015 forward price for the rest of the year with a price level of €0.50 megawatt/hour, higher than the current 2016 forward curve. We have reached a level of 25%. The full coverage is usually finalized in the second half and now we are starting to hedge at higher prices. In LATAM, finally, we have reached the optimal hedging level for both 2015 and 2016 at increasing prices, mainly in Chile and in Brazil. Now let’s look at the operational highlights. So the total installed capacity, as Francesco said, declined by more than 7 gigawatt or about 8% due to the following 6 gigawatt closures mainly in Italy where we have already closed more than 50% of our 15 gigawatt program. As far as hydro generation capacity is concerned, the decline of about 1 gigawatt is due to the deconsolidation of SE Hydropower for roughly 250 megawatts following the asset sale and the deconsolidation of some hydro assets in Slovakia following some pending legal disputes. And we are mentioning the Gabcikovo plant of around 700 megawatt. Notwithstanding the continuing decrease in installed capacity, we registered a healthy recovery in the net production plus 3%, mainly in Iberia and in renewables. In particular, coal production rose by 9%, CCGT by 14% mainly in Italy and Spain, due to lower hydro electricity and higher thermal gas in the case of Iberia. Renewables rose by 4%, thanks to capacity additions despite weaker wind and hydro conditions in Europe. As a consequence, the group load factor rose to 37% from 33% last year. Continuing group operational data as far as distributed electricity is concerned, the growth is not only focused in LATAM, but in all the geography areas but Italy. For example, Spain recorded a plus 2% year-on-year increase and Romania rose by 5%. In the last 12 months, we added roughly 500 million end users mainly in LATAM. Now moving to first half group financial figures, as already shown in the first slide of the presentation, the reported group EBITDA rose by circa 2%. Net of extraordinary items, the ordinary EBITDA remained broadly flat. In more detail, in the first half of 2015, we recorded €273 million of extraordinary items due to €141 million for the capital gain on SE Hydropower sale and €132 million related to the accounting impact of the finalization of the 3Sun acquisition, while in 2014 we recorded €132 million of extraordinary items related to €50 million on SE Hydropower and €82 million related to the sale of Arctic Russia. Now we’ll take a moment to update on the cash cost, a new metric we have introduced in March. As you can see in chart 17, cash cost increased by 4% in nominal terms. On a like-for-like basis stripping out one-off items, they would increase by only 2% which corresponds to a plus 10% in maintenance CapEx and minus 1% in OpEx. Maintenance CapEx, as I will explain later on, increased by 10% as we have anticipated some planned maintenance activities in the first half to accelerate OpEx efficiency in the second half. As far as OpEx is concerned on a like-for-like basis, adjusted OpEx for one-off items decreased by 1%. The one-off items effects includes perimeter, delta provisions and capitalization adjustments. We launched the new efficiency plan six months ago and specific action plans have been deployed and the implementation phase is ongoing. We are expecting to fully achieve our target and the full potential of our plan within 12 to 18 months. The OpEx reduction has been achieved thanks to external source as you can see from slide, while personnel costs increase is mainly in LATAM. The savings have been achieved in the major countries and especially in Italy, some 7% decrease in cost. Instead the costs are still increasing in LATAM, almost entirely due to [Chilean] effect and Argentinean operations due to regulatory requirements. Specific managerial actions have been already identified and implemented and personnel cost savings will be achieved in a longer timeframe, the already said 12 to 18 months. On a like-for-like basis, OpEx savings have been achieved in all the business areas as shown in this slide, and this is slide page 19. And the efficiencies achieved are more than offset in the negative effects scenario mainly in LATAM and growth in renewables. In real terms, efficiencies have been higher than 3% in six months. EPI improved in all the business lines, more specifically global generation is accelerating our plant closures in major countries. In the first half, 7 gigawatt have been commissioned. Several initiatives have also been launched to optimize maintenance costs and enhance procurement savings. Headcount has been reduced by 3.5%. Global distribution has achieved relevant cost savings in major countries where headcount has been reduced by 3%. In renewables, we are reducing the unitary cost per megawatt and we are also achieving savings in staff costs and in-country services. As far as maintenance CapEx is concerned, and we are now on page 20, we have registered this increase of about 10%, mainly in LATAM. As already stated, the increase in maintenance CapEx is fully related to some planned maintenance activities in the first half that we brought forward in order to accelerate other efficiencies in the second half. In light of the above, we foresee 2015 figures slightly decreasing versus last year. And we are strongly confident to achieve at least our 2016 target of €3.2 billion meaning €300 million less versus 2015. In the first half figure are being affected – the 10% increase in conventional generation for about €80 million mainly due to [indiscernible] in Argentina and the ramping of Bocamina 2 and in distribution €50 million mainly in LATAM due to acceleration of some network programs. Now have a look at group ordinary EBITDA starting from the business line, and we are now on page 21. As you can see, EBITDA from global infrastructure and networks is roughly €305 billion and declined by €116 million versus last year or minus 3%. But net of one-off items that are equal to €280 million recorded in the first half 2014 and plus €100 million recorded in first half 2015, so net of these one-off effects EBITDA would increase 6% thanks to the new connections, higher demand in LATAM and regulatory improvements in Argentina and Brazil. EBITDA in global generation and trading is €2.1 billion and it’s increased by 17% of €306 million. Also for global generation and trading, net of one-off items that are equal to minus €160 million in 2014 related to regulatory revision of the [Iceland] Iberia, and plus €186 million related to C02 swaps in first half 2015, EBITDA would have decreased 7% mainly due to lower hydro in most countries, lower prices both in Italy and Slovakia and the worsening scenario in terms of effect on prices in Russia, partially compensated by higher prices and volumes in Iberia. Renewables is equal to €946 million, rose by €75 million mainly thanks to additional capacity in LATAM and North America and positive impact on favorable exchange rates. The overall group retail business EBITDA is equal to €1.1 billion, a decrease by 18% versus last year, mainly due to margins normalization in Spain linked to the increase in power purchase cost, which more than offset the significant increase in Italy of about €130 million thanks to gross margin increase and flat costs year on year. Let’s now have a look at the group ordinary EBITDA by region. Iberia is – on EBITDA, closed EBITDA with €1.9 billion, increased by €272 million mainly thanks to one-off effects already mentioned. Stripping out this effect, Iberia would decrease of around 5% mainly due to normalization of hydro condition which more than offset positive contribution from higher volumes and prices. LATAM EBITDA is equal to €1.4 billion and shows the healthy increase of 15% mainly driven by the improvement in generation in Chile and the already mentioned tariff increase in Argentina. This positive performance was partially offset by the expected decrease in Italy. The EBITDA in Italy is equal to €3 billion and has a reduction of 12% versus 2014. This net of positive one-off in 2014 is in the range of 5% decrease. This is the decrease following the decrease in generation for roughly €270 million due to lower prices in hydro. This is partially compensated by the increase in retail. And finally, East Europe the EBITDA is €392 million, it’s down 23% year on year. And this is due to the reduction in prices in Slovakia and Russia with a significant negative FX effect mainly based on Russia. On the next slide, we can look at our group net ordinary income result. D&A remain broadly stable, notwithstanding the increase in CapEx thanks to the reduction in Italy and Iberia following the impairment recorded in full year 2014 in Italy, and also for the useful life extension of Spanish nuclear gas plants. Our net financial charges amounted to €1.277 billion and has declined by more than 20% versus last year mainly due to change in other financial expenses. So in more detail we recorded €1.323 billion of net financial charges on that. And this is roughly 4% lower than last year. And I will provide more details after and the positive contribution of €46 million for other financial expenses in 2015. Last year, we had a negative impact of roughly €300 million. And the main items of this are the negative one-off in 2014 for €170 million of which €124 million some rough adjustments in AMPLA in our distribution in Brazil. And then a positive one-off for about €70 million Argentina due to the cancellation of interest, then some increase in capitalized interest for about €50 million and other expense. Income taxes in the period rose by €45 million due to an increase of around €110 million from higher earnings before taxes, around €130 million of saving lower taxes in Italy following the elimination of the Robin Hood tax, and around €70 million of higher taxes in LATAM mainly due to tax reforms in Chile and Colombia. As far as debt and financial expenses are concerned, and now we are on page 24, our gross debt declined by €2.7 billion, while net debt increased by €2.5 billion, mostly due to the FX effect. As you know this is a pure transaction effect required by IFRS rules and will not turn into cash since our debt is fully hedged through cross-currency swap. The reported level of gross debt recalculated across currency swap effects fixed in the contracts at the time of the future repayments would end up to a figure of close to €52 billion instead of €54.3 billion, so €2 billion lower than the reported level. The gross debt reduction, net of tax effect is still roughly €4 billion, equal to the reduction of cash, following the repayment of roughly €4 billion of bonds of Enel SpA and NFP. Moreover we have a decline of financial receivables for about €1.5 billion. Cost of debt has decreased by circa 20 basis points to 4.8%. Net financial expenses on net debt decreased by 4% and this is thanks to the refinancing of bonds and credit lines negotiations and this is worth more about €150 million for less cost and on the other side, an increase of financial expenses in LATAM in Enel Green Power for a higher stock and cost of debt. In this sense, LATAM financing is one of the main areas of potential savings related to the corporate reorganizational line. In addition to this, we confirm our expectation for a ramp-up in the reduction of net financial expenses throughout the year, thanks to the managerial actions already implemented. And we do confirm that our interest expenses will decrease by about 7% at the end of the year. Then on the net free cash flow, in the period we have generated more than €3 billion of FFO with a material improvement versus the last year, say around plus 80% with a significant increase in EBITDA conversion year on year. EBITDA conversion into FFO has increased in fact from about 20% of last year to circa 40% in the first half of 2015 and this is thanks to the following
Francesco Starace:

Thank you, Alberto. We have provided you an update on the major strategic topic of our industrial plan. In Latin America reorganization, we are progressing according to a well-defined and faster process that will unlock significant value for the group. For Slovenske Elektrarne, we are going to select a preferred bidder in the next days. With them we will finalize negotiations and reach a binding agreement by year end. As far as structural growth is concerned, we have secured 2015 growth EBITDA and 60% of our target of growth EBITDA for 2017, thanks to a bulk of total assets in execution of about €7.8 billion which is about 40% of total growth CapEx plan. Efficiency plan is well on track and you will see full delivery on our guidance in the coming 12 to 18 months. The group reorganization we have introduced last year is already showing signs of delivering improvements in cash flow as we have just heard from Alberto. We confirm our 2015 targets and we continue to work hard on driving this positive trajectory for our company. Thank you for your attention and let’s now open to the Q&A session.
Operator:

[Operator Instructions] Lawson Steele from Berenberg.
Lawson Steele:

First of all, the restructuring of the LATAM business is clearly way overdue and makes an awful lot of sense from the point of having line of sight management at the very least. But typically, however, many LATAM operations have been run efficiently at least when I used to cover them and especially when compared against peers. So to what extent are you confident that reshaping the group will actually lead to cost savings? And with the complexity in place today, is it even possible to forecast what those cost savings might be with any sense of confidence? And if so, can you even know what time to expect any efficiency gains to materialize? Secondly, could you update us on your current view on the outlook of Italian generation prices and of course the gas price now that you’re seen that the Asia and Europe price spread has – gas price spread has virtually disappeared. And with more gas LNG supply from the likes of Australia and USA, do you think the Italian gas price will fall further from the current levels? Thirdly, could you take us through the principal moves behind the €1.763 billion increase in working capital and what expectations you now have for the full year for working capital please? And then finally, I see that retail sales initially were up 24% in first half and that the EBITDA margin has climbed from 7% to 9.3%. Could you please give us some commentary there on how sustainable you see the margin increase and volume progression and when you see competition coming in to chomp away at that margin?
Francesco Starace:

I will answer the first two questions and the fourth and the third one will be handled by Alberto. On LATAM, the restructuring, there are basically, you should say, two levels of efficiency that we are targeting. One is the operational efficiency level. To be honest with you and you are right, this has not to do so much with the restructuring of the corporate structure because this is handled and tackled by the group restructuring that we carried out already. The global business lines are those that are driving this kind of efficiency and therefore that is already something that we have been addressing in the last 12 months, six months starting from this year and it is unfolding nicely. We don’t expect the corporate restructuring to affect it rather than maybe help it and speed it up a little bit. I’m talking about how do we spread best practices across different countries. I’m talking about how we maximize the use of spare parts across different countries. I’m talking about how we improve the overall CapEx efficiency programs across different technologies. So your observation is right. They’re well run and they are run quite efficiently. There is an increasing layer of efficiency that we will carry out, spreading the best practice across the global position that we have in the world. However, there is a second degree of efficiency which comes from the corporate restructuring and that has to do with cash efficiency. So what cash is trapped in the many companies and legal entities we own around this Latin America continent? What double taxations are we today exposed to when we look at the operations we have across the different countries and the fiscal regulatory frameworks that are different? What kind of financial improvements we can have when we look at how we cross finance this operation? That kind of efficiency has not yet kicked in. It will kick in and it’s quite material. Just for your record, only the fiscal double taxation impact is something in the range of $40 million to $50 million a year compared to the present situation and when compared to the simplified structure that I have explained to you. And these kind of efficiencies, the second kind of efficiency will only materialize after we have finished the restructuring of the corporate complex structure we have in Latin America. As far as further price erosion on gas in Italy, as a consequence of what is observed in spot markets around the world, the recent increase in connectivity in, let’s say, gas markets thanks to the larger volumes of LNG being traded around the world. Yes, there is certainly, if these trends stay for a longer time some kind of reverberation over the medium long term, yes. However, gas prices in Italy today are by and large dictated by pipe contracts and these pipe contracts in the hands of the bigger incumbent ENI and in our case for what concerns ourselves do not really have a strong link to spot prices. So over the medium long term, if these low spot prices remain, I would say yes, you would try and see in Europe and therefore also Italy, some kind of gas price erosion. We don’t see it on the short to medium term today. Retail sale in Italy going up in terms of volume and margins, how much can that stand the test of additional competition? Obviously this cannot last forever. We think however there are two separations here. Volume and that means the number of customers and underlying energy consumed by them, they will keep growing because we will keep growing the customer base. Today, we are targeting to get even. That means to sell to customers, end customers, the energy we produce in Enel Green Power and Enel Produzione and that leaves around 20 kilowatt hours of base to grow. So we will keep that growing. As far as margins are concerned, they are largely the result of the decline in wholesale market prices that we have observed in the last three, four years. Our sense is that these are more or less bottoming, so you will not look at this derivative going forward all the years. But the stickiness of customers and the very weak competition we have today in Italy basically suggests that we will keep the volume growing without substantially eroding the margin. And the churn rates that we enjoy today are relatively physiological in the industry. So this is a relatively couple of years, two, three years, going forward, stable business with a good growth curve in terms of volume and a stable margin outlook. I think there was a question on working capital?
Alberto de Paoli:

The capital numbers that you see in the chart, we have absorbed €1.8 billion in the first half from net working capital. Last year, we absorbed €2.8 billion, so this is the improvement I was mentioning before. If we see at the end of the year, you can take that this absorbed €1.8 billion will be close to zero. So you can add €2 billion of less generation in the second half from net working capital.
Operator:

And now, Javier Suarez from Mediobanca, please go ahead.
Javier Suarez:

Three questions on my side too. The first one is on the restructuring of the company in Latin America as a follow up, obviously this makes a lot of sense, but after the restructuring, you still will have four subsidiaries listed in Latin America plus Enel Green Power, plus Endesa, plus the asset in Brazil. So what the company intends to do to reduce the holding discount. As a follow-up, what the company intends to do with Endesa? And there has been several press reports suggesting that the company may be considering or there has been the option to reduce the stake on Endesa. Can you update us on that possibility? And also do you think that the company and the current holding structure of Enel Green Power is sustainable down the road or that could be considered too? That is the first question. And the second question is on the cost of debt. There has been mentioning to the possible reduction in the cost of debt at the group. But the company has reallocated CapEx into Latin America and the cost of debt in Latin America is higher than the cost of debt for European activities. So in order to avoid a mismatch between cash flow generation and debt financing, should we consider or see an increase in the cost of debt for the company rather than a decrease? And the third question is on the forward selling for electricity. There is backwardation on your forward selling and obviously there is a deviation versus the target that you presented in March. So does the company feel the necessity to restate those targets on electricity prices for 2017 and onward? And what managerial effort the company can take to compensate that effect?
Francesco Starace:

So the first question is the mother of all questions, you know. Actually I think let’s put it this way. First of all, let me be very clear. I fully understand that there might be investors out there that see Endesa as a fantastic opportunity for an acquisition and they see value in that. I understand it and I fully appreciate that. That said, we are not in the process of selling Endesa or portions of Endesa anymore. And we see indeed in Endesa a lot of additional value creation that maybe is behind and beyond the pure financials, so the fact that Endesa is a very nice company producing a lot of cash with little debt. There’s more than that in Endesa at industrial level and there’s more than that in the Iberian Peninsula at the industrial level. So we’re not going – you will not see corporate activity in Endesa at all. And the same on Enel Green Power for different reasons. I think the results that we published on Enel Green Power yesterday show that growth curve of Enel Green Power is strong and healthy. It generates well, good profits and it is an integral part of the growth story of Enel. We don’t see any need to change the setup we have today in these two companies, because we have now to accomplished the major important step that is to fix the third company that we have today which is in a messy state, Enersis. So you will see us focused on Enersis for the next, I would say, six to nine months because that is really the very important story that we have to bring home. Is there a holding discount in Enel? As I said, it will take about – in my opinion about 12 months for everyone to be looking at Enel as a very efficient value creation machine using different companies around the world to accomplish these, but spreading best practices and becoming a very integrated industrial player. There’s a lot of that value creation around the world that is in our hands, but not fully appreciated by the market because the market is looking at legal entities and listed companies. So first, we will carry out a demonstration in physical terms of what we are today saying and I think this first semester shows that we are in that direction. And then I think the holding discount will slowly disappear on its own and if necessary, then we will take some steps to finally address that last issue. As long as the evolution of forward prices in energy in Italy and Spain, I think I will let Alberto now comment as far as that is concerned and also as far as the concern that moving CapEx into Latin America intrinsically will grow our debt cost.
Alberto de Paoli:

So Javier, so I have two questions from you. So one is on the cost of debt in LATAM and the second is on the price curve in Italy. First of all, I would say that I said 50% of hedge in Italy for 2016 have been done at a level in which we have no impact on the margins, we already have in the business plan for 2015 because we hedged the margin and not only the price for selling. We see now prices are rising, so we think that we can look at what will happen in the next months in the market. We are confident that we can cover our residual power generation at a level in which will not affect our margin for 2016. But for sure, we are now active because you know that we are going to present a new plan in November, so we are active now in delivering a new efficiency plan to be in the safe zone and to have other fuel and other cost cutting to cover any gaps that might occur if our hedging strategy would be a little bit slower than our expectation. When it comes on LATAM, first of all, take into account one important point that investments in LATAM are peaking in 2015. So when you see the spike in debt and also in cost of debt, it’s because in 2015 we have a peak in investment. If you look at our plan, five years plan we presented in March, you can easily see that LATAM is going to produce and to create a sum of €15 billion of FFO, covering €9 billion of investment and €5 billion of dividend. What we see is that Latin America can easily invest €9 billion, €10 billion, leaving the level of debt at a stable level. Having said that, we have not really initiated to simplify and also restructure our financial flow management in Latin America because we are expecting that the simplification of the corporate structure will be done. But we think that we have a lot of actions that can be implemented to lower the cost of debt. So all in all, I do think that the cost of debt that we have in the plan is okay and we think we have further room to decrease the debt, the cost of debt in Latin America.
Operator:

Now, Harry Wyburd from Merrill Lynch, hi Harry, please go ahead.
Harry Wyburd:

Just one question from me please on free cash flow. Can I ask how much of the €15.5 billion group free cash flow for 2015 to 2019 which you’ve guided to in your March business plan is expected to come from Italy? I think in your March 2014 plan, you guided to €7.6 billion between 2014 to 2018. So I’m interested to know what the equivalent would be for 2015 to 2019. Thanks.
Alberto de Paoli:

These numbers are the numbers that we have in our plan. So from Italy we can, all in all, say that if you ask me this to understand how much we can cover, the dividends that we have to pay to final shareholders, to Enel shareholders, you know that in our assumption we are going to pay €9 billion of dividend. This €9 billion of dividend, Italy on a standalone basis generates roughly €6.5 billion of cash available for dividend distribution. The rest will be paid by the dividends that the other subsidiaries will pay. So all in all, what we think that from Italy and other dividends paid by other subsidiaries will stay in the range of €12.5 billion well above the €9 billion that we have to pay.
Operator:

Anna Maria Scaglia from...
Alberto de Paoli:

Only to better simplify. So if your question is on the €15.5 billion, there is a different view. So €15.5 billion of free cash flow, Italy is generating €6.5 billion. The rest is generating out of Italy. When it comes to the dividend payments, so the €9 billion, Italy is still generating €6.5 billion, but the dividends from the other subsidiaries is generating the rest. I think this clarifies.
Operator:

Anna Maria Scaglia from Morgan Stanley, please go ahead.
Anna Maria Scaglia:

The first question is regarding LATAM restructuring, we’ve seen that one of the minority shareholder appealed against the SVS decision. I was wondering if you can update us in terms of the dialogue you have with the minorities and how confident you are of being able to implement this strategy and if these appeals can really have a negative impact on the process. The second question is regarding your target for the year. You confirmed the target in terms of EBITDA and net income. I was wondering if you have – following the performance in the first half, if you have expectations that the mix might be materially different. Clearly in LATAM, there is a lot of growth prospects for the second half, if I look at your target. So can you comment on that? Third question is regarding the distribution review in Italy. In particular, I saw that in one of the proposals the government is – the regulator is proposing to revise the average life of the asset. What’s your view there? Are you planning if this goes ahead to revise also your depreciation to offset this impact, therefore net income should be minimal? And last on the disposals, I was looking at your slide and you have around €2 billion from Slovenske and the hydro assets in Italy which implies around €1.2 billion for Slovenske. Is this also including the debt of Slovenske going out from your asset? And as well, when you talk about this dual track, does this involve selling a stake to the government of Slovakia or are you planning to sell the whole stake to a new shareholder?
Francesco Starace:

Let me just start from this last question. Then I will handle the question of Latin America and the third question on distribution tariffs and Alberto will handle the mix, if the target – if the guidance can imply a different mix of results. So on Slovenske, yes, of course this includes the debt of Slovenske. And let me clarify this. We have been in constant dialogue with the government which is the co-shareholder of Slovenske Elektrarne. The government of Slovakia has appointed some advisors to help out in the process of deciding if and when and how much would they like to buy in the process that we are undergoing starting from now to say two years down the road, when Slovenske Elektrarne will be finally – when Mochovce 3 and 4 will be finally in operation. We have explained to the government that we would be ready and willing to sell the stake they would like to buy concurrently with the first step sale to a third party in any time during the construction of Mochovce 3 and 4 or at the end of the process. So they basically have total freedom of flexibility to decide according to their internal schedule how much and when are they ready to buy. So the flexibility is there and we are ready and willing to accommodate them. On the first point that says [indiscernible] the SVS decision, okay, only one appealed and that’s already quite a big change. We know that they are not in agreement between themselves on the outlook for this transaction. I think there are different negotiation tactics and styles. The fragmentation on the front helps. We think this is positive. We think it is not something to be scared of. We are not concerned that the SVS will not confirm its judgment. It’s very sound and very well thought off. They deliberated a while before coming out with it. So we don’t expect changes. The dialogue with the SAP is ongoing. It’s actually moving very smoothly now that there is no third party correlated transaction nightmare front in front of us. And so our approach has been very fair, very open. And the fact that we have now changed the approach to a one-step process ongoing which includes giving them the fair valuation of all the components of the transaction upfront so that they have a clear view of what the values are from the very beginning helps. So we are positive on that. And I think this story is unfolding much better than previously was thought of. As far as distribution review, the distribution tariff review is ongoing as you know. The authority has issued an interesting paper. We like it. I would say in general and broad terms, it’s a very creative and a very innovative way of going forward. We like the fact that six years is the new timeframe, it’s no more four. We like the fact that there is an intrinsic premium for improvements in the performance of the grids with additional features being then digital or non-digital, but in any case. And we like the fact also that there is a second phase of the process that might imply a switch to TOTEX. We are not concerned by this. We think it’s a constructive dialogue, the one going on. We think you, the community of analysts have been also good at explaining to our authorities what is detrimental to the business and what helps. So I encourage you to continue to do that. And what more to say? I think we will look at some very, more material numbers coming out probably at the end of September before the third quarter is finished.
Alberto de Paoli:

I think I have to add three things. One is now we are discussing with the regulator. So we ran some sensitivities on this possibility to have a longer time for D&A. And what we see is that we have no material impact on EPS because we will have also lower D&A and at the end the overall impact is meaningful. This is for the first. On the target, I think that we have to wait a little bit longer to understand how the second half will go. Today I said we have in the first half, we had a certain amount of one-off items. So stripping out the one-off items and looking at the second half in the line of the first half, we can easily confirm our target, not more than this. And last on the Slovakian disposals, sure, the overall level included the net debt. When I say roughly €2 billion for the cluster, it’s not mathematical. So I think that we can, having closed in a better way the two transactions we have closed, we can also go up overall from the €2 billion.
Operator:

And now Enrico Bartoli from MainFirst, go ahead.
Enrico Bartoli:

A few questions from my side. First of all, going back to the Italian electricity market, actually the authority is proposing to change the structural tariff, probably in order to force more consumption over the next few years. So can you elaborate a bit on that if you see that this could provide some opportunities for you particularly in the retail business? Then I have a question related to your net debt guidance for the full year. If I remember well, it’s €39.2 billion. Just to understand if the positive evolution in working capital and movement of funds that we have seen in the first half was already included in this number and if it includes also the net debt of Slovenske Elektrarne or not. Then I have a question related to slide 41. Actually the reconciliation of your net debt here includes minus €0.2 billion of contribution from Iberia. Actually, could you guide us understand what actually is the level of the net debt related to Endesa that you consolidate in your net debt? I guess this €0.2 billion doesn’t take into account the loan that you have with the Spanish company.
Francesco Starace:

Let me answer the first question and the second two and third will be answered by Alberto. Yes, the authority is going to probably restructure a little bit the electricity distribution tariff, electricity tariff. As you know, the Italian tariff is a little bit – implies an internal subsidy from a certain number of, quite a few millions of customers that pay a little more vis-a-vis others, but pay a little less than they should. This comes from a distant past. It has a little bit distorted the electricity patterns of consumption in the country. We think it’s a good idea to fix it. We think you’re right that this might unlock the value in cluster of customers that were so far relatively unattractive from a free market standpoint because they paid so little because they had this internal subsidy that they had basically an invulnerable position when approached by a free market operator. So yes, in principle we think it’s a good idea. In principle we think it will unlock the market in terms of free market opportunities. That it will happen overnight is another question because there are some kind of political resistances to that. So you would be very cautious that wouldn’t be a revolution all of a sudden. They will probably migrate customers more gradually than people think. Our view is yes, it’s positive, it’s going to take a while okay. Alberto?
Alberto de Paoli:

For our guidance, at the end of this year, on debt we already included this kind of benefit for the first half taking into account that we see – looking at 2014 and 2015 results of debt that we will suffer about €1 billion, €1.5 billion of FX effect. So net of this, we have, with the higher level of dividends and higher level of CapEx a sort of stability in our net debt net of FX effects. And for your question on page 41, the figure is the figure of only the third party debt. So it’s the size of the third party debt of the group. And we have on top of this, we have roughly €3 billion of inter-company loans among the Enel Group and Endesa.
Enrico Bartoli:

Sorry, just to be clear, in order to compare the net debt you have in your total figure with the €499 billion reported by Endesa, the two figures are the same, or there is some difference there?
Alberto de Paoli:

The figures are the same, but as I said we have – so all in all the figures are the same. But Endesa has the level that you see there that is the gross debt to third parties plus the inter-company debt. So Endesa is reporting the overall debt, but you have to add the €1.6 billion in the inter-company debt, so all in all its €3.8 billion.
Operator:

Now, Cosma Panzacchi from Bernstein.
Cosma Panzacchi:

I have a couple of questions regarding mostly the evolution of regulation. So first of all, if I look again all the production, the regulatory production of the regulator recently on networks, it seems that the regulator really highlights the need for material new investments in the grid, for example in smart distribution system. But at the same time, it seems to me that the remuneration system and also the rollout of the new smart meters, the new generation of smart meters is at this point a little bit cloudy in the framework that the regulator is designing. What is your point of view on the current framework that the regulator is setting out for smart meters going forward? Do you still think that there will be an upside opportunity there going forward? Second, again on networks, speaking recently with trade unions, if I’m not wrong, Mr. Starace has recently reconfirmed the willingness of Enel to participate in the ultra broadband rollout plan of the Italian government and has highlighted September as one of the key months for an update on this scheme. However, if I look at the [indiscernible] communication decree that never materialized, and if I look at the stronger position of TI against the full deployment of a full FTTH approach, I wonder if you are still truly positive on the potential upside in this area, if September is still a credible deadline and finally how your involvement could be compatible with not making TI’s network a fully stranded asset? And the final question is on the outlook of power generation in Italy again. I think that you’ve been one of the strongest advocates in terms of a reform of the market abandoning a pure system marginal price in favor of more, better longer term stability and, if you want, an overview of where the prices are going. From this point of view I think Enel Green Power has also tried to create some sort of agreement with Enel Italy recently trying to stabilize revenues going forward, but with limited success so far. So what do you think that still needs to happen before long-term PPAs, for example, will be allowed and become prevalent in the market? And specifically with regard to Enel Green Power, what are the hurdles for the conclusion of such an agreement?
Francesco Starace:

All right, so I’ll start with smart meters. Let me give you some updates. First of all, the change on smart meters is not something that comes all of a sudden. It’s a 15 years technical life expiration that is coming in 2016 for the first meters that were installed in 2001. So that is a known thing, and it’s the process that’s been on for a while. The issue is today, rather, shall we just replace the meters with existing ones or shall we replace the meters with new ones, being a new design? And this is obviously the second case is the case, because digital devices that are 15 years old are replaced by devices that are much better and cheaper than them. So it’s a no-brainer that a new meter is better than just the same meter again and that has been clarified. Today, we are in the following steps. The authority is getting through the nitty-gritty details of the features and functions, additional capabilities of the new device. Just to give you an example, these are devices that will enable, for example, prepayment from a remote or a local access. And additionally, it can be interrogated by the customer independently than the network and lots of stuff. So these new devices are being, I would say, approved and vetted by the authorities. This will take maybe another month. Then, they will be finally rolled out in the investment process. The tariff takes that into account. That is an improvement of technology into the system, according to the features that the authority will have authorized or approved, and therefore it will be recognized as an additional revenue stream for us. Over and above the normal RAB, pure RAB amortized replacement. What we need to be careful with is that we don’t have stranded meters. So basically, the pace of replacement should mirror the pace of installment that took place 15 years ago. Okay? Now, as far as ultra-broadband rollout plan, what is going on? Again, what we’re doing today is we have looking at around 25 smaller, medium-sized cities in the various A, B, C, D zones in which Italy has been divided that will include the ultra-broadband connectivity attractiveness. We’re doing that alone and with Infratel and other players, including TIM, to have a full knowledge and a complete understanding what the synergies are, what are the cost reductions and what kind of improvements our participation to the process are bringing about. We will finish this in September. At that stage, we will be free to define what is our involvement in this. Provided that we stick to what we have just said already, that we repeat here, A, we are not going to become another telecom operator, so we’re not going to provide content. B, we don’t want to be the owners of these cables. They should be owned by the operators that manage the grid. We will be the party responsible for laying them down and maintaining them for 20 years, so there will be a stream of revenue related to that activity alone. What the impact of that will be on the existing network of telecom, it’s not up to me to say, and let’s not get into that at all. I don’t know enough about this matter to be able to comment. Now, as far as power generation in Italy, what changes is likely, they are the changes that will happen in Europe, and we see the new market design that has been leaked out of Brussels by the Commissioner Canete and Maros Sefcovic going in the direction of long-term power purchase agreements being back into the game in Europe, and therefore they will come back in Italy too. It’s been going faster than we thought. We knew this was coming, and it’s now heavily moving forward. Of course, everything is relative in European terms. One can say it’s heavily moving forward, but nothing is happening actually. At the end of the day, I think this is something that through 2016 will finally start to see the light, and that is basically the reason why we freeze any activity on that front that was going on. You’re right. We think it’s better to let the European dialogue get along well, and therefore, I think the power generation in Italy will benefit from long-term pricing signals, by and large. There will be capacity payments in the meantime, yes. It will be material for most operators, probably not.
Operator:

Manuel Palomo from Exane BNP Paribas, please go ahead.
Manuel Palomo:

To be honest, most of my questions have been answered. Just wanted to get an update on your feeling about what the Enel Group could get as a benefit from a potential CFD with Enel Green Power for Enel Green Power in order to remove the risk to the Italian power price. Then, I would like to ask you about a couple of clarifications. One is as regards to the €39.2 billion net debt target that you are giving for the year end, I do not know whether you have already answered this, but I did not get it clear, are you including or excluding the debt associated to the assets held for sale? That’s the number-one question. And the second clarification is on hedging price in Spain, slide 13. You are mentioning €56 a megawatt hour, while if I recall a couple of days ago, in the investor presentation, Mr. Bogas was talking about above €60. I wonder what is the difference, whether you are referring to different prices, or if you could explain?
Francesco Starace:

On the EGP issues, which I discussed before, first of all, let me clarify, this is not only an EGP issue. It’s in general merchant generation, which includes also Enel Produzione, it’s an overall transaction, which does not only refer to Enel Green Power. But as I said, we decided not to carry this on for the time being, because we saw an acceleration on the European regulatory front that might be better wait. So there’s no news there and the thing is just stalling and put back in the refrigerator, waiting for an evolution at Brussels level on that front. I comment, this is not only EGP. It’s all merchant generation by and large in Italy. There’s Enel Produzione and EGP from our side, but a lot of other players have the same issue. We think maybe it was a good idea to start it. Maybe this was one of the reasons why. In fact, in Brussels, I told that see us moving this quickly, we pushed them also. But at this point, we said let’s just not jump the gun and wait for what kind of regulatory framework changes. They drive from there into our system. Alberto, on the other questions?
Alberto de Paoli:

So the €39.2 billion guidance excludes the Slovenske Elektrarne debt. And the second is the €60 of Pepe Bogas’ guidance, so the reconciliation is we have €56, and this includes also ancillary services and capacity payments in the price and the two worth roughly €4, so you have a reconciliation of €56 towards €60.
Operator:

Alberto Gandolfi from UBS.
Alberto Gandolfi:

I have three. The first one is just to go again around Enel Green Power, if I understood correctly, Chief Executive Starace just said that six to nine months, the focus is LATAM, nothing on the horizon on Green Power. But my question would be, when I look at the organization of Enel, you’re organized by country, and then you have divisional heads, so you have Enel Italy, and then you may have the global head of distribution, which also includes distribution in Italy. Well, Enel Green Power appears to be the only business line which is not organized that way. So my point is if the market continues to basically forget about value in any growth that’s in power, how long will you be patient for? And the second point is, at the Investor Day, you talked about maintaining the independent culture of Green Power. That’s why you don’t want to blend it with conventional generation. But my point is, would you have to? If you take it off the market, you can just move the headquarters to another city, and that Green Power, forgive me here for suggesting that. But wouldn’t that achieve also the change in culture that you’re seeking to preserve? Second question is about a little bit thinking about expanding your scope. And I’m thinking about here a fine line between diversification and complexity. Do you see any effectively lacking pillars to your current portfolios? So is there any economy that perhaps move in a less correlated way to Italy, Spain or LATAM that you might be keen to gain exposure to, being with €1 billion invested capital, being with €10 billion invested capital? But is it US regulated, is it UK, something in Central Europe? It would be great if you could elaborate on that. And lastly, on generation Italy, on my calculation, your EBITDA is largely ancillary services, because I could say that the EBITDA made in coal and hydro is really enough to pay for your OpEx at the moment. So I really welcome your closure plan, but my question will be, how far can you go, over and above the plans you already announced? And when closures will not only take down OpEx but will begin to have an impact on your assessment on spreads and on the supply/demand?
Francesco Starace:

Enel Green Power, well, Enel Green Power is not really that different when you look at the organization the way it is, because it is basically a division – it is a global business line similar to, for example, grids today, articulated in different countries. And I know that comes from some kind of habit of industry that we like to look at this industry as a sum of geographies. I think it’s roughly a big mistake which we keep doing. The real structure of the industry is in a cluster of technologies, so you have to look at Green Power and you have to look at global distribution the same way. Green Power has an articulation in geographies that somehow overlaps with the one of, for example, grids and other traditional distribution and in other cases does not. In the other cases, it’s there too. We have, for example, grids in Romania and renewables in Romania, and this is the case in which they overlap. So the country articulation is completely secondary in our view. The business line driving forces will take over the corporate life of Enel in the long term. So there is no need to change this organization. It’s just a question of working at it and building what is today still not at the same level. Green Power started four years earlier. Global distribution and global generation started last year. So you would see this coming in the next probably 12 months. There is no need to articulate a different – and even then, to put headquarters in a different place, it doesn’t really add value itself. It’s just another application, maybe unless there is some fiscal benefit somehow, but there is no plan on doing that at the moment. In terms of lacking pillars, I say they are lacking pillars in several geographies, and again, back to the same point. Well, you look at that and you say there are different things in the world where we are not present. We’re not in Asia. We’re now starting. You will see us moving in Asia in the next months, not because we are tired of elsewhere, but because we think we need to find, as I said, one or two new places going forward every day. We don’t think we need to become the biggest player of Indonesia tomorrow, but we need to start moving and create opportunities worldwide as much as we can, provided that we pay attention and we don’t make mistakes. Today, I don’t see one part of the world where it is a disaster not to be. We think we are moving quite well and it will take time. Maybe what you would have to look at is, is there a technology or some kind of new business line that you are not fully focused upon? Yes, and in that case, I can say, yes, there is, and unfortunately it’s a very elusive part of the business for most of the utilities nowadays, and we’re focusing very much on this new frontiers of additional customer behavior and a lot of services that are allocated to that. We don’t have an answer. We don’t have a solution. But we are working at that, and I think you will look at our strategic plan articulation, getting more in details in that sense. As far as generation in Italy, what I can say is that we have sold the system, that 13,000 megawatts of plants will not be started up again in the next future. And we have already closed 6,000 of them and another 7,000 will be closed this coming month. Over and above that, we don’t see much going on, except continuously improving the environmental performance of coal and gas units that we want to keep on. The only preservation policy that you can have in Europe and in general in the OECD countries, as far as the generation fleet is concerned, is to make sure that you are always the best in class in terms of environmental impact. That will put pressure on regulators. That will put pressure on competitors. That will preserve your position and that’s what we’re going to do.
Alberto de Paoli:

I only would add a comment on the MSD, on the [indiscernible] system, only to clarify that more or less our – we have roughly €700 million on a yearly basis of margin from MSD. But you cannot compare this $700 million with EBITDA of generation. You have to compare it with the gross margin of generation. And we have roughly, say, €2 billion of gross margin, so the MSD is an important part of our gross margin, but it’s in the range of 35% of the gross margin, so it’s not the entire margin of the generation.
Operator:

Javier Garrido from JPMorgan.
Javier Garrido:

Just two very quick questions, I promise. Firstly, on your cross-currency swaps, if I understand correctly, that will give you €2 billion of extra FFO over and above your natural EBITDA conversion. Can you tell us what’s the duration, how much of those €2 billion are you expecting to get in the next full year to the end of the current strategic plan? And the second question, I don’t know if I understood correctly, the second unit of Mochovce is expected to be completed in the first half 2018. Is that correct?
Francesco Starace:

Mochovce has two units, and the time between the two is six months. The last one, yes, first quarter 2018. The first one, which is Mochovce 3 – sorry for this, it’s Mochovce 3 is the second – Mochovce 4 is the second, Mochovce 3 is the first. One is end of 2017 and Mochovce 4 first quarter of 2018. This is the schedule today. Sorry, end of 2018. Last quarter 2018, yes.
Alberto de Paoli:

For the first question, it’s not in this way, so what we provided is that the question for us was what will be the cost of debt at the time of repayment. So we say how we can strip out the accounting effects in asking us what will be the cash effect at the time of the payment, looking at the cross-currency swaps. So today, we have an accounting level of debt of €54.3 billion. But at the repayment date, this debt will be €52 billion, because of the cross-currency swap effect. It’s not something that is today in our FFO assumptions. It’s only to say this is a pure accounting effect, because at the repayment date, the effect in the cash out for the debt repayment will be €52 billion.
Javier Garrido:

Sorry, that is what I meant. In the end, you are going to put it this way, I have €2 billion of extra cash flow, or you are going to have €2 billion of lower cash outflow. But in the end is a net €2 billion benefit versus what the accounting net debt shows. So what I wanted to know is when that €2 billion, call it, saving on cash payments, on interest, will be seen, because that will be a mismatch between your accounting interest cost and your cash interest cost.
Alberto de Paoli:

It’s not related to interest costs. It is only related to the value of the repayment of the debt. So in the interest costs, you have – in the cash flow, you have the hedge each time you pay interest. This is only a valuation calculation of the value of the debt repayment, not of the interest payment. So it’s only a pure exercise to say this €54 billion that we have today, the cash that we will need to repay the debt, only the amount of debt, the answer is no, because at the time of repayment, the cash that we will need to repay the debt will be less because of the effect of the cross-currency swaps.
Javier Garrido:

So it’s a €2 billion benefit in principal payment, not in interest payment, but it’s a €2 billion difference?
Alberto de Paoli:

Exactly.
Operator:

Antonella Bianchessi from Citi.
Antonella Bianchessi:

First of all, are you confirming the €7.8 billion of CapEx on the full year? The second question is, if I look at – you’re saying that your business plan is on track and you confirm a €15 billion EBITDA this year and next, but if I look at this year EBITDA, there are something like €500 million of nonrecurring elements. There is a regulatory review happening over the next year, and also the currency in Latin America are weakening. So which is the asset that will support the growth and will allow you to maintain the same level of EBITDA in 2016? The third question is on supply margins. They are up something like €600 million over the last three years. Do you think this is sustainable? Do you see any increase in competition, the increasing churn rate or all these things? So if you can comment on this level. And finally, on the cash flow, if I just look at your debt level targets in the short term, this year, you are basically assuming that you will generate €1 billion, €1.5 billion of cash flow before paying the dividend. Endesa is cash flow positive. Enersis is materially cash flow positive. Okay, Green Power is negative, but there is nothing left. So can you elaborate on where the cash is going over and above the cash flow generated in Italy? So what’s happening in the holding system of the country that absorbs cash?
Francesco Starace:

Antonella, let me just go through this in order. I will start with the issue on competition, supply margins and volumes. I guess you were referring to Italy, I imagine.
Antonella Bianchessi:

Yes.
Francesco Starace:

I think I discussed this a little bit earlier, but let me just go a little bit more in detail, so the question is very good. The competitive landscape in Italy is very, very flat. Who is our competitor on the retail market today in this country? Is it ENI, who is at this very moment deciding maybe to spin off this business itself? Is it Edison, who is not at all active on the market? Is it Sorgenia, who is reeling under the debt? Are there smaller players that might be active now and then? The fact is, EON is lost, has left the country, too. The fact is, for some time, and I don’t think this can last forever for sure, but for some time, and I think this has been going to last more than two years, there is no competition worth the name in this country on that front. So that said, is that meaning that our life is easy and that we can make a party of the days? No. We are the incumbent, and the incumbent has some obligations in the market. And I think we can say that we have behaved as an incumbent quite successfully in the past. So we will keep growing the volume, as I said, because I think the number of customers, the quality of customers and customer relationship has an intrinsic value over and above the margins that we sell energy every year. We will increase the number of customers, reaching a point, a mix of customers that will have cumulative profile that will match our cumulative profile of production and no more, no less, than the volumes we target to produce. There is, of course, an approximation there. We will do that without destroying value, because there is no real competitive environment at this moment worth the name. There is some competition. Everyone is trying to cope, but nothing more. I think the real competition comes from the tariff subsidies that are today part of the debate in the tariff restructuring that we discussed before, and we see a positive sign that this cross subsidy is now going to fade out, as I said, with due time. So I think that addresses one of those four questions. I think there was one on the cash flow. I don’t know if you’re ready to do that, or you want to go on the €7.8 billion. Yes, the €7.8 billion CapEx full year, yes, we definitely confirm, this is the CapEx that we plan to be spending at the end of the year. We don’t see an issue of meeting this figure. We will not exceed it, we will not go short. We will be there precisely probably at the end of the year. As far as the cash flow is concerned, maybe, Alberto, you want to talk to it.
Alberto de Paoli:

So what we said in the business plan was that for the first year and so 2015, we do confirm the €7.8 billion of investment, and as you can easily understand it is a big push ahead. And this is because we have to restart the growth, and as said, we now already gave the guidance that we will cover €400 million of EBITDA growth in 2015, and we have already achieved roughly 60%, or €1.3 billion of EBITDA growth in 2017. So you can linearize the two dots and you can understand that one of the growths that we will really on to get the 2016 result is already in the fact that we have already achieved a level of EBITDA growth for 2016 that stays in the middle of €400 million and €1.3 billion of the two years that we gave as a guidance. So it’s the first point in which we rely on to get targets of 2016, and we are confident on the other side that we can cover some gaps in scenarios and commodities with further efficiencies that we are putting in the company. So we are also quite confident we can go ahead in our efficiency target in 2016. So we think that the target will be achieved, I don’t say easily achieved, but with well management will be achieved also in 2016. On the other side, when it comes to cash flow and this is the point, you know because we said that our active portfolio management of €5 billion will be matched in disposal and acquisitions, but this match will be done not in the first years, because in the first year we will have some support from disposal to keep the level of debt stable. And then when the cash flow will improve, we will do some acquisition, because the focus is to support our €18 billion of growth, not changing our debt figures except of FX effects that are not foreseeable clearly. Having said that, from where the cash flow comes to support our effort, as said, and I come back to our plan, so I think because I stick to the plan, because I don’t see any material changes to the previous plan we presented, we have in Italy that it’s going to produce a free cash flow, so cash flow after CapEx in the plan of roughly €9 billion. In Iberia there is roughly €6 billion, and Latin America, there is roughly €6 billion. These are the free cash flow available to cover the investments and available to pay dividend payments. All in all in the plan is €14 billion. €9 billion is for Enel shareholders and €5 billion is for other shareholders, our other minorities. This is the plan.
Antonella Bianchessi:

Yes, but the math doesn’t add up, because if Italy does €9 billion, LATAM does €6 billion, and there are other €6 billion, then this makes €21 billion and not €15 billion that is in your plan?
Alberto de Paoli:

Then you have Enel Green Power that will absorb.
Antonella Bianchessi:

But they just said it’s only €1 billion.
Alberto de Paoli:

So then you have this is – then you have the holding, the staffs and everything...
Antonella Bianchessi:

Exactly, that’s what I wanted to understand.
Alberto de Paoli:

It’s exactly what we said in the business plan, so the absorption, the sum up is €21 billion, and then you have Enel Green Power, the holding and other functions, and you reach €15 billion. Italy has said in this case deducting the holding, so we say €9 billion, and the cost of the holding is roughly €2.3 billion. So Italy with holding is producing €6.5 billion in the period.
Operator:

Zach Mecelis from Covalis Capital.
Zach Mecelis:

I’ll be very quick. I just wanted to firm up or understand a bit more your statement regarding value creation in Latin America. Specifically, you mentioned that you have a CapEx plan already lined up. But can you address specifically payout ratio, target balance sheet. The companies right now, they are very under levered, so I just wanted to see how you are thinking about the payout ratios, the target debt to EBITDA ratios and what instruments you would use to get there, in terms of showing the value creation. Would it be buybacks, special dividend? And lastly, I would like to clarify ownership target for Enersis Americas. You’re now showing that you’re going to own more than 50%. Is there any restriction of you owning more than 50%, as it was with current Enersis and Endesa Chile structure? So any clarification and more specifics would be appreciated.
Francesco Starace:

Let me clarify this. The ownership constraints that we have are related to Chile and the laws that apply to the assets in Chile. They contaminate all our presence in Latin America, because they are altogether into Enersis. The moment that we isolate the Chilean assets in Chile with the Chilean holdings, these limitations will apply, although will not change. But they will apply to that company, and they would not automatically expand to the other holding companies. So there, we would not have that limitation that caps us to 65%, as we are in Chile. As far as value creation is concerned, I think you referred to what kind of value can be unlocked when a package blended as Enersis is then split into more targeted factors. We have really – this is a study that we haven’t done in detail, and I don’t think it makes any sense for us to give you estimations. Everyone can have his own view and the beauty of this is because the views differ, these deals happen. If we all had the same view, then there would be no value creation whatsoever at this point. So we think that there is obviously some value in separating intrinsically risk free areas with limited growth potential, say, Chile, with more risky areas, with much more growth potential say for example, Brazil. We think that, but we’re not going to today put figures on the table. We think the market will finally go out and decide. The experience that we had, for example, with Endesa was extremely positive, and I think there is a potential similar story unfolding in Latin America to that end, but I cannot attach figures to that. Sorry.
Zach Mecelis:

So will there be a timeline when we’re going to have those figures, because the reason Endesa worked was a very clear communication strategy on dividend, and that was that market was willing to pay for. We have not heard anything yet on any specifics regarding the payout ratios, dividends or target balance, which would be nice to have to have the proper valuation.
Francesco Starace:

You have a point. I think clearly, the moment that we will incorporate this new legal entity, as you know, there will be at least listed at the top one, they will do their own investor day, their own investor equity story. They will announce clear policies as far as investment growth and dividends are concerned. And it would be today inappropriate that we do it in here without having this whole structure put in place and the Boards take their own decision.
Alberto de Paoli:

Yes, I think [indiscernible] you can take page 11, because this is the indicative transaction timeline. If you look at this, we foresee a final Board decision at the end of October, and you know that by the end of November, we are going to present a new plan. So the AGM will be called for December, so in the time between October and December, there will be [indiscernible] and communication to the market, because shareholders have to vote in the AGM on one side, and the group has to present a new plan. What I can say is for sure that we are working on two separate entities also in looking at a new business plan. In doing this, as different from the previous exercise we made for the entire LATAM, because now we are focusing on specific strategies for the two companies and looking at the different perspective of cash generation and everything and also growth. So for sure, we will have this different proposition in the business plan, and we think we will start to communicate and meeting with shareholders after the Board of Directors will approve in October this transaction.
Operator:

Alberto Ponti from SocGen.
Alberto Ponti:

Hi. All my questions have been answered. Thank you.
Operator:

From RBC?
Unverified Analyst:

A couple questions. The first one’s on net debt, with actually two parts, €39.2 billion target confirmed for the full year. Does that assume €2 billion proceeds in respect of the disposal plans that you have outlined? And secondly, in respect to debt, back at the investor day, you talked about an FX difference of €1 billion. This morning, you’ve talked about €1.5 billion, so just wondered what is actually going better on the debt side of things to enable you to keep the year-end target the same. And then secondly, and just picking up again on LATAM and some of the numbers there, what net income impact do you expect at the Enel level of the moves that you are making to reorganize the Latin American operations?
Alberto de Paoli:

I’ll take the three questions. The second is, yes, so I hope because if the FX worsen, we will suffer for an increase in FX impact, so I think it’s something that is related to the market. And now we have some assumptions for the year, and then we will see what will happen in the second half. For LATAM, net impact on net income, so we can say that we see and now we are expecting these new plans, we can be more precise after having done new plans. We know that we have some intrinsic value creation inside the transaction, mainly on this side. We see a significant value added in the overall fiscal build, but with this complex nature, the fiscal impact, the fiscal structure, is highly inefficient. And moving on the net debt, the end of the year, we do expect that – really, today, we are looking at the value of the debt, staying stick to a value that is around what we had in the first half, just because we don’t know we had a lot of transactions that we don’t know if they would be closed end of the year, beginning of next year, so we see usual swing of, say, one, two months, so exactly we don’t know. And the other side, another, say, €800 million of value of transaction is already taken off, because it’s the debt of Slovenske that we don’t measure in the €39.2 billion. So if I have to say, today, I have closed €800 million, and I can say that if I sell the first tranche of Slovenske, I can say that already I included in the €39.2 billion another €1 billion of disposals, so it’s all in all.
Operator:

Just one question from the web. Could you please give more details on the performance of the Italian infrastructure and why EBITDA decreased by almost 14%?
Alberto de Paoli:

So we have this answer is in the page – what I said, in the page 21. We said that, all in all, at a global level, we have a decrease of distribution, but stripping out the one-off items, mainly in Italy, we would have an increase of 6%. This is exactly what is for the Italian distribution. Stripping out the one-off effect of last year, the distribution in Italy is flat.
Elisabetta Ghezzi:

Okay, we have finished our presentation. Thank you very much for the attention and IR department will be available for your further questions. Thank you very much. Have a nice day.
Francesco Starace:

Thank you.

Enel SpA Q2 2015 Earnings Call Transcript

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Enel SpA
Q2 2015 Earnings Call Transcript