Enersis S.A. (NYSE:HTS)
Q2 2010 Earnings Call
July 28, 2010 12:00 pm ET
Alfredo Ergas - CFO
Leandro Kappa - Deutsche Bank
Good day, ladies and gentlemen, and welcome to the First Half 2010 Enersis S.A ADS Earnings Conference Call. My name is Jasmin, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes.
During this conference call, we may make statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements could include statements regarding the intent, belief or current expectations of Enersis and its management with respect to among other things, Enersis business plans, Enersis cost reduction plans; trends affecting Enersis financial condition or result of operations, including market trends in the electricity sector in Chile or elsewhere, supervision and regulation of the electricity sector in Chile or elsewhere and the future effect of any changes in the laws and regulations applicable to Enersis affiliates.
Such forward-looking statements reflect only our current expectations and are not guarantees for future performance and involve risks and uncertainties. Actual results may differ materially from those anticipated in the forward-looking statements as a result of various factors. These factors include a decline in the equity capital markets of the United States or Chile, an increase in the market rates of interest in the United States or elsewhere, adverse decisions by government regulators in Chile or elsewhere and other factors described in Enersis Annual Report on the Form 20-F, including under risk factors. You may access our 20-F from the SEC's website, www.sec.gov.
Readers are cautioned not to place undue reliance on those forward-looking statements which speak only as of the dates. Enersis undertakes no obligation to update these forward-looking statements or to disclose any development as a result of which these forward-looking statements become inaccurate.
At this time, I would now like to turn the conference over to your host for today Mr. Alfredo Ergas, Regional Chief Financial Officer. Please proceed.
Thank you very much. You are very welcome to this conference call. Today, we’re going to review the performance of the Enersis Group over the first half of this year. My name is Alfredo Ergas, CFO of Enersis. And here with me is Mr. Ricardo Alvial, Investment and Risk Director and Rodrigo Perez, our Head of Investor Relations. As customary, we’ll receive all the questions at the end of this conference call and we’ll be glad to answer all the questions you may have.
Before we start, I will highlight a couple of important things. First of all, as anticipated, at the end of June, Chile began to experience the first signal of a strong recovery. We have seen a big increase in consumption, new jobs and growing and fixed capital increase and we are very sure that we will have growth in demand. Increased demand is positively in part of the electricity business during the rest of the year and we have seen all the signals that we have mentioned.
Secondly, the higher demand has been seen in most of the distribution concessionaries where we operate. We’re reaching a 5.7% in physical sales on average, if we are taking in account all the concessionaries where we operate. And this increase, we will perceive it as reinforcing the necessity of incorporating additional capacity, opening opportunity and new projects.
Regarding our performance during the first half, let me start with distribution and then we will move to generation. Let me say that our operating results coming from this line of business increased 5.1%, it is basically for our better outcome in Brazil and in Colombia. And the result of that in terms of EBITDA is that we received a 7% higher EBITDA compared with the first semester of last year. The main reason behind this improvement were 5.7% increase in physical sales, as I mentioned before and the addition of 391,000 new clients as part of our natural growth.
As part of a country-by-country analysis, let me highlight the following. In Brazil, we experienced an increase of 40% in EBITDA, basically explained by an increase in the demand during the first half of 2010 of 6.7% in Ampla and an impressive 16.8% in COELCE. In COELCE, they are mainly explained by the lack of energy demand experienced in 2009 due to economic downturns in the region. Additionally during the first half of this year our distribution subsidiaries experienced a better sales mix and better average prices.
In Peru, EBITDA increased by 2%, a 7.2% higher energy demand due to increasing economic activity in the country and let me say that this effect will partially compensate by relatively worse sales mix. In Columbia, our EBITDA was in line with our 2009 results. However, our operating results was affected by a lower sales margin resulting from the new clustering of distribution company, the typical area as part of our regulatory change that’s starting application in January 2010, which resulted in a momentarily lower VAD at Codensa. This change is in line with the aim of the regulator to ensure supply to all of the customers.
However, during the second half of 2010, the sales price of Codensa would experience a recovery in order to be aligned with the other distribution companies group in the new distribution area. Additionally, in Colombia, the change in the business model of Codensa Hogar resulting in its disconsideration, reduced operating revenue of Codensa. Remember that we sold Codensa Hogar at the end of the last year. All these effects were partially offset by higher demand on Cundinamarca and lower maintenance costs.
In Chile, in distribution we had a decrease in the EBITDA of 26%. The most important reason of that is decreased sales price related to a lower VAD resulting from a lower adjustment factor and also for higher maintenance costs mainly from the increasing branding cost of service and alliance with US index prices affected for the positive operation of the US during the first half of 2010 versus 2009.
In Argentina, we also evidence a lower EBITDA mainly as a consequence of a change in sales mix with a higher relative increase of sales, win other clients with lower tariff rates of residential customer with higher tariff resulting in a lower average tariff. And also an increase in our operating cost mainly relate to salary increase experienced and also due to higher maintenance costs related to heavy rains suffered during the period.
Summarizing the distribution business performance, I can like highlight improvements in operating results from our Brazilian subsidiaries of 41.5%, due to an increase in demand and better sales mix. Additionally, positive results from distribution subsidiaries must be understood in the context of our sustained increase in demand in the countries where we operate with remarkable figures in Argentina [4%], Columbia 5%, Chile 6%, Brazil 10% and Peru by 12%. Let me remind you that most of our concessionaries are located in big cities with the highest density rural areas of each country. This give us an early capture of any economic recovery considering how centralized our countries are.
Let’s move to our generation business. In aggregate, operating income decreased 27% basically due to our lower sales, lower generation and diminished prices. The main reasons behind these weaker results were lower average prices in Chile, higher (inaudible) cost in Columbia and Argentina and lower volumes of sales with remarkable exception overseas, a decrease of 7.7% in physical sales result in a group because of net purchase during the period which is explained due to a 9.9% lower hydro-electrical generation in the period, mainly as a result of the lower hydrology experienced during the period.
Let’s review country by country. In Brazil, we had a decrease of 16% in EBITDA, explained by lower revenues, in our transmissions CIEN, due to a lower operation in comparison with the first half of the last year. As in the first half of 2010, the transmission lines do not operate due to lack of contracts. However if we isolate the results coming from our transmission business, EBITDA from our generation activities in Brazil experienced a 42% increase compared with the same period of last year. This result of better sales margin of Fortaleza and Cachoeira Dourada which is the result of better hydrology resulting in lower spot prices, that reduce energy purchase costs combined with good sales prices to distribution companies.
In Peru, we reached 13 lower EBITDA. The reason of that is, first of all our 3% lower sales volume explained for the end of the contract with ELECTROPERU in September of the last year, and also for higher cost of energy purchased due to the absence of the non-recurring provisions registered of June 2009, related to this division without contract will reduce energy costs in 2009.
In Columbia, we registered our lower 6% EBITDA basically as a consequence of poor hydrology derived from the El Niño phenomenon and a less efficient production mix due to higher thermal production and higher cost of energy purchase related to the higher thermal production. This later negative effect could not be compensated despite a 32% increase in average prices.
In Chile the EBTIDA decreased 31%, lower average prices, resulting of the operation in full force of long-term contracts with distribution companies. These contracts have a lower average price than the price supplied during the last year. However, the (inaudible) of this contract will increase. We expect prices to move forward to the end of 2010. Also the decrease in the EBITDA is a result of our 2.3% lower generation related to decrease in thermal generation mainly explained for the non-operating of (inaudible) as a consequence of earthquake. The operation at this plant will be resumed in September of this year.
Both negative effects were partially offset by 20% lower fuel cost related to decreased thermal generation. In Argentina, in generation we also evidenced a lower EBITDA of 7% compared with the last year. The main reason of that is our 16% fuel cost increase, 16% lower physical sales mainly explained by the lower thermal generation. And these two circumstances were partially compensated with a better duration mix resulting from the relatively higher hydro generation.
In brief if we need to summarize the generation business contributed less than in the previous quarter basically due to 7.4% of lower revenues despite the 8% reduction of operating costs related to lower thermal productions.
Let me give a market summary. The Chilean stock market offers foremost of the other markets as measured by their most relevant index. In fact if you take the IPSA and the Chilean index increased 13.5%, the BOVESPA in Brazil 11.6% and the Dow Jones 6.3% and S&P 7.6% compared with the Chilean itself 13.5.
In the Chilean stock market, Enersis shares continue to be one of the top five most traded confirming the high liquidity of our stocks. That explains that when Chile pension funds have to diminish their equity concentration, they prefer selling highly liquid shares. That was the case during the first half of 2010 and explained to a large extent some downward price pressure for both in Enersis and our principle subsidiary Endesa Chile. In this regard, Enersis shares price in the local market decreased 6.2% during the period measured in Chilean peso.
Let me give you some key topics that we perceive you need to take on mind. On Brazil the positive trend exceeded by the overall economic activity is boosting the necessity of our new installed capacity. In fact, the last available information, it forecasting a 7% to 8% decrease in demand for this year. We have been preparing all of our distribution asset in Brazil to properly face this important growth in demand. In fact our investment in CapEx achieved about $152 million during the first half of 2010. An important part of this investment plan is devoted to control commercial losses related to debt.
We will continue applying the state-of-the-art solutions to deal with energy losses which represents one of the most profitable project for the company. In terms of our new investments, we continue on evaluating the best alternative to increase operations in that country. Remember that we are in pursuit to make money instead of just growth. In Chile, the recovery of the Chilean economy particularly in the (inaudible) sector as necessary to satisfy the original needs coming from the reconstruction effort is experiencing an important part of the 5% to 6% increase in the demand of electricity. As of year-to-date, most of this growth will be more visible during the second half of this year, considering the recovery of the Chilean economy after the earthquake.
In relation to new business, we are working in environmental study as required by the authorities, considering the availability of energy as a key condition to support the reconstruction effort. The government has urged us to involve parties in accelerating the administrative processes related to approval on new projects, but properly keeping the environmental request. In Columbia, the preliminary data gathered by the weather agencies seems to confirm that it will return to more normal rainy seasons. So a high availability of water will take the system to a more efficient generation mix, elevating core and prices. A new government in Columbia will be in office since August. And until now, no big announcements have been given in relation to the electrical sector.
In Peru, considering the positive trends showed by the Peruvian economy during the last year, our distribution and also our generation are prepared to probably the satisfy the growing demand. In that context we will enforce the generation capacity of our power plant at the time of investing and agreed to assure the best services of northern half of Lima City.
Before ending this conference, let me summarize some key highlights for the first half just ended. The 17.7% reduction of our results before taxes is in line with the lower activity derived from the earthquake, poor hydrological condition which led us to generate with more expensive thermal facilities. The unusual increase in income taxes are strictly related to the Peruvian Chilean peso versus US dollar and does not have cash implications.
The addition of almost 400,000 new clients confirms the natural and sustained growth of our distribution business. The important increase of demand in all of our concessionaries was a key and we continue to be a positive source of stability in our portfolio. Our better financial result and strong liquidity should continue through the year preparing us to be ready to afford a potential in business requirement.
The solid rating risk and rating from Standard & Poor's, Fitch and Moody’s give us a very competitive access to capital and financial markets, key condition to finance new projects. As you have heard, we are in a very good condition to face a promissory second half of this year. The analyst can be found in our press release available in our web page. Additionally, if you have more specific questions regarding the result of our business, please contact our Investor Relations department and they will be glad to assist you.
Thank you very much for your attention. And now, I would like to pass the call to operator for the question you may have.
Your first question comes from the line of Leandro Kappa with Deutsche Bank.
Leandro Kappa - Deutsche Bank
I wanted to know how the status in (inaudible) can impact on selected distribution volumes. Okay and I also want to know about hydrology expectations in Peru, Columbia and Argentina.
Do you want to know the variation between quarters?
Leandro Kappa - Deutsche Bank
What is the effect as far second half of 2010 and I also want to know about the figures and how they impact your volumes?
Yes. Remember that we have very high correlation with the GDP in each of the countries where we operate. So based on our expectation in all of the countries that you mentioned, we expect in all of the country where we operate they will grow. And if I need to give you an average I will think that it will be in around 4% to 5% in average for the total number of countries where we operate.
Leandro Kappa - Deutsche Bank
And hydrology expectations for the countries?
I will be there hydrology up for the next month, but based on the measure that we have received, I will say that hydrology will be improved in Colombia as I mentioned in my speech. And also we have seen that in Chile, all the temperature and the snow that we have seen in the mountains, they’re giving us the information to predict that it will be normal year for Chile.
Leandro Kappa - Deutsche Bank
And then six pillars in the system like yesterday, and also on distribution problem and are they subject to any penalties from this kind of failures?
We don’t expect that the those shortcuts, they will repeat because also the private sector in the company here in Chile, I think they have been taking all the measures to control the shortcut and also the authority. They have been very clear to say that all the companies, they need to take all the spent on the actions to prevent that there will be repeat in the future. So I don’t think that it will affect in an important way or sales during this quarter due to the shortcuts as we have suffered.
(Operator Instructions). Your next question comes from the line of Leandro Cappa with Deutsche Bank. Please proceed.
Leandro Kappa - Deutsche Bank
Hi. I have one more questions about contracts with distribution companies. Do you expect any renovation for second half of 2010 and at which prices do you expect the renovations?
Are you talking about renovation about what?
Leandro Kappa - Deutsche Bank
Distribution contracts, contracts from generation of distribution companies?
We don't expect there would be changes there Leandro. If you have a question or details that you would need to know about it, please contact directly to our Investor Relations department. Okay.
At this time there are no further questions.
Okay. I hope that, this speech has been so clear that you don't need to have more clarification of what we have said. Thank you very much for participating in today’s conference call. We encourage you to maintain a close relation with our Investor Relation department here to answer all of your question. We are very enthusiastic about second half and we will be in touch. Thank you very much. Bye-bye.
Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.