Enersis S.A. (ENI) Q1 2014 Earnings Conference Call May 6, 2014 11:00 AM ET
Eduardo Escaffi – CFO
Charles Fishman – Morningstar
Ezequiel Fernández – Scotia
Good day, ladies and gentlemen, and welcome to the First Quarter Results 2014 Enersis Earnings Conference Call. My name is Gwen, and I’ll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]
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 results of operations, including market trends in the electricity sector in Chile or elsewhere, supervision and regulation of electricity sector in Chile or elsewhere, and the future effects of any changes in the laws and regulations applicable to Enersis or its affiliates.
Such forward-looking statements reflect only our current expectations, are not guarantees of future performance, and involve risks and uncertainties. Actual results may differ materially from those anticipated in the forward-looking statements as a result of various factors. These factors include a decline in the equity capital markets of the United States or Chile, an increase in the market rates of interest in the United States or elsewhere, adverse decisions by government regulators in Chile or elsewhere, and other factors described in Enersis Annual Report on Form 20-F, including under Risk Factors. You may access our 20-F on the SEC’s website www.sec.gov.
Readers are cautioned not to place undue reliance on those forward-looking statements which speak only as of their date. Enersis undertakes no obligation to update these forward-looking statements or to disclose any development as a result of which these forward-looking statements become inaccurate.
I would now like to turn the presentation over to Mr. Eduardo Escaffi, Enersis CFO. Please proceed.
Thank you, Lynne. Good morning, ladies and gentlemen, and welcome to our first quarter results presentation for 2014. Before beginning, let me remind you that our conference call is supported by a presentation that has been already uploaded in our website. My name is Eduardo Escaffi, Enersis Chief Financial Officer.
And I’m here today with Pedro Cañamero, head of Investor Relations who also will be available to assist you with further detailed information after the call, if you need it. Also, as usual, I will take any questions you may have at the end of the presentation.
Now let’s begin by providing you some highlights for the period on slide number two. Let me update you briefly on the use of our capital increased funds and recent developments regarding investment decisions. Since the beginning of the year, the Group has acquired 15% of Coelce in Brazil, reaching 75% – 74% both in control. 50% of gas [indiscernible] complex in Northern Chile, reaching 100% ownership.
We also have launched the construction of the 150 megawatts hydropower plant Los Condores in Chile and the recent announcement to purchase 21.14% economic interest in Edgel in Peru increasing in the case of having all the regulatory approvals enhances economic interest from 37.5% to 59%.
EBITDA in the first three months of the year decreased by about 5%, reaching $750 million during the first three months of 2014. By country all the negative effects that we had experience in Chile as a result of the forced shutdown of Bocamina II and the extra cost in this division in Argentina have been partially mitigated by the positive activity in Peru, Colombia and Brazil which showed EBITDA increase of 25%, 10% and 9% respectively.
In terms business, our generation business performed well, increasing EBITDA by 9% in comparison to 2013. On the other hand, our distribution business declined about 20% mainly due to the above mentioned extra distribution cost in Argentina, arising from the heat wave suffered at the end of last year in that country. We don’t expect this effect in the following quarters.
All in all, for this quarter, we have accumulated one-off impact for a total amount of minus $140 million, excluding this effects EBITDA in the first quarter have increased by 13.2%. Let me also highlight that income – the net income attributable towards shareholder for the period now represents 64% of total net income that compares probably with the 43% we obtained last year during the same period. This increase is mainly explained by the successful capital increase completed in March 2013, and to a higher degree of economic interest in our subsidiaries.
Also our distribution business continues to grow on a healthier pace. At the end of March 2014, we can count on making 6,000 more clients reaching almost 14.5 million customers and average electricity demand growth of 4.6% will illustrate in our concession areas.
Finally, regarding the organic growth our 400 megawatt project – hydro project in Colombia El Quimbo is close to 65% completed and we are planning to finish it in 2015. Also in Colombia, we have also finished the first 111 megawatt for the hydro power plant Salaco which – will have a total incremental capacity of 145 megawatts at the end of 2014.
Now let’s analyze more our activity related with the use of funds and other investment decisions in slide number three. Since the beginning of the year we have announced operations and investments for a total value of about $1.6 billion. On February 17, we announced the acquisition of 15.13% of Coelce’s shares reaching a total participation of 74% for a total amount of $242 million invested.
At this regard the offer regarding all united shares is still open till May 16. On April 1, we communicated to the market the exercise of the first refusal option for – Chile. The operation will increase our participation of this energy holding in Northern Chile up to 100%. That investment on the transaction of this succession is of $309 million. On April the 30th, we recently informed to the market the purchase of 21.14% of Edgel for a total amount of $430 million. This operation will leave an excess with a total participation close to 59% increasing from the previous 37.5%. The transaction is expected to be close in the following months after the green from the Peruvian regulatory authorities.
Let me highlight you that with these three operations we would increase 213 net income for Enersis’ shareholders in about $81 million or 6%. Finally, on April 1, we announced the construction of the 150 megawatt hydropower plant that was conversing Chile which will be finalized at the end of 2018.
Let’s now analyze the business context during the period in slide number four. As you can see in the after part of the slide, the electricity demand growth of our distribution company increased by 4.6% on average. In particular, the demand growth in Brazil was close to 8%, since the beginning of the year. Peru was close to 4% and Columbia 3%. Average losses for the group increased slightly to 10.9% versus10.5% 2013 as we continue to suffer depreciation effect on Ampla.
On the generation side, output increased by 0.5% reaching about 14 terawatt-hour. This happens even taking consideration and the production shutdown coming to in Chile, where the impact of lower thermal generation was compensated with higher hydro production in Chile, Brazil, thanks to [indiscernible] and thermal generation in Argentina.
As far as the spot market is concerned the situation continues to be focused on a current hydroelectric low capacity in Brazil which continues to be at levels far beyond the maximum level. In this context Enersis spot prices for the first three months of the year were on average $291 per megawatt hour, nearly doubling the prices of last year.
In Chile prices continue to mark a dry surplus probability of 82%, ratifying that we are still and there were restrictions during the first quarter. Nevertheless, the situation is improving our reservoir limit on April the first, those isobars we are accumulating 14% of high potential hydroelectricity.
The marginal costs in the country for the simple interconnected system was around $166 per megawatt hour, 16% higher versus last year, and surpass the prices recorded in Northern Chile and Northern the Sing system which were around $88 per megawatt hour.
In Colombia, the hydro situation improved versus the other two countries. Our most important hydro reservoir in the country, the [indiscernible] is at 82% capacity versus historical level. Here the spot prices were down 11% versus the same period of last year and at the same levels of $83 per megawatt hour.
Let’s continue with an overview of the same relevant financial highlight in slide number five.
EBITDA during the first quarter of 2014 amounted to $750 million, or 4.6% lower compared to the same period of last year. Mainly as a consequence of the already mentioned higher cost resulting from the shutdown of Bocamina II. And the overrun cost in Argentina related with the heat wave we suffered last year.
In the case of Bocamina II, this effect has been well compensated by generation activities in other countries, leading to the total EBITDA increase of about 9% in generation business. On the other hand, this distribution business has suffered the negative effects on costs related with the last year blackout in Buenos Aires. Overall, EBITDA distribution business declined 20% during the period.
EBIT decreased by 9.4% amounting $535 million during the period also as a consequence of the $15 million higher depreciation and amortization in the Brazilian distribution business, in relation with high investments in the region.
Let me now focus your attention on financial expenses in slide number six. Net financial expenses increased by about 7% amounting $111 million mainly as a consequence of high exchange rate combustion costs, on the debt we hold in dollars in Argentina for an amount of $68 million, as a consequence of the strong Argentine peso devaluation.
Our average cost of debt during the period was 8.5% compared with 8.1% in the same period of last year. On taxes we are having the significant related with the exchange rate. During the period we record an increase of about 52% or $78 million which is a total amount of $227 million. $67 million out of those $78 million increase as a result of higher taxes on capital gains, coming from the incremental value of our attributable asset base, the taxable asset base denominated in foreign currencies different than the Chilean peso.
As a result of this net income for a period amounted to $100 million to $218 million down 38% versus the first quarter of 2015. In any case let me remind you that thanks to the offsetting effect of the income contribution obtained during the last year capital increase net income attributable to Enersis shareholders decreased only by 8.7% reaching $159 million and of course this is the quantity we will have to take in to account in order to pay future dividends.
Before describing the evolution of the EBITDA on a country-by-country basis in the next slide, let me focus your attention on the regulatory update of the business in slide number seven. As you know regulation is a key consideration as a development of our activities especially in the distribution business. Regarding the Chilean tax reform project on April the 1st, the new government sent its proposal stating that there will be [Indiscernible] increase in the general corporate tax from the current 20% to 25% in 2017. Also from 2018 onwards owner of the companies will be taxed by all the attributable income base not only by the distributed profits via dividends as it is currently.
The reform also considers a tax on carbon emissions, nitrogen oxidize and sulfur dioxide for boilers and several turbines of more than 15 megawatts from 2020 onwards. In the case of the CO2 emissions, tax will be equivalent to $5 per ton emitted should be reform is approved in its current form.
In Brazil, the review process on Ampla 2014, the tariff is ended on April the 7th, resulting on an average positive tariff adjustments of 2.64%. This will be applied from April the 8th onwards. The X factor for Ampla was fixed at 1.66%. Also on April 15th ENEL approved the [indiscernible] Coelce’s tariff readjustment. In an average of 16.77% re-effected from April 22 onwards, mainly impacted by the overrun cost coming from energy processes and inflation.
Moving to Argentina it is important to highlight the distribution business that negotiations with the national state continues in order to receive compensations for CPI adjustments and in turn carrying out works for distribution and control of losses.
In addition, it will be defined reference VAD by province or region, you know to compare similar concession areas. In Colombia the tariff review process regarding 2014, 2019 period our distribution company Codensa is ongoing and we expect to – the publication of the new tariff during the first quarter of 2014.
In Colombia – sorry, with this we finished regulatory update of the business. Now on slide eight, you will find a snapshot of our EBITDA contribution country-by-country. As you can see the EBITDA during the first quarter of 2014 in local currency decreased both in Chile and Argentina, these decreases were partially compensated by the increases in Brazil, Colombia and Peru.
But let me be more specific on this on a country-by-country basis starting with Chile on slide number nine. First let me update you on the status of Bocamina II. As you already know [indiscernible] submitted an appeal against Bocamina II at the court of appeals Concepción in December 2013. Having that the energy plant was operating without an approved environmental license, such court on December 17, requested the shutdown of Bocamina II until the final resolution will be clear. This unit continues paralyzed today, and we expect the situation would revert on in the short-period. Taking into consequence into account this general EBITDA in Chile decreases 29% of all $51 million.
In particular, Chile has generated generation reflected lower results due to higher costs from energy purchases and a higher access tolls in online, as Bocamina II was shut down during the period.
As a result of this, generation EBITDA decreased by about 43% or $43 million. These results include the positive effects of higher energy sales, thanks to an increase of 26% in prices and the reduction in fuel costs during the period.
In the distribution segment, our operations released an 11% decrease in EBITDA, mainly explained by higher operating costs partially offset by higher revenues from energy sales.
Electricity demand grew by 3.5% in our concession area, while energy losses remain almost flat. Also, during 2014, we added 7,000 more customers, surpassing 1.7 million clients.
Let’s move now to our Brazilian operations on slide number 10. Brazilian EBITDA increased by 9% during the period. Excluding exchange effects, EBITDA increased by 11%. In particular, and considering local currency, EBITDA in generation increased by about 58% or $45 million, thanks to higher prices on energy sales in [indiscernible].
In this division, EBITDA decreased by about 12% or $19 million mainly due to the effect of the dry condition effect in Brazil during 2014, which increased energy costs incurred by distributors as they were more exposed to this spot market.
These extra costs have been recovered nearly in total by the Australian Government and the rest will be recovered through year 2015. Finally, let me highlight that the number of customers in Coelce and Ampla increased by 14,000 during the first – the first three months of the year rating jointly 6.4 million customers.
Let’s now turn to our Columbian activities on the slide 11, EBITDA increased by 9.5% or $28 million and includes a positive FX effect of $13 million excluding these affect EBITDA increased only by 5% or $15 million.
In particular in local currency generation EBITDA remained almost flat when compared to last year since the spot prices have shown the downturn from the unusual high level showed during 2013. This was partially compensated by higher ARPU.
Let me take the occasion to tell you that since the first quarter of this year we count with 111 megawatts of additional higher capacity pertaining to 145 million megawatt Salaco operated, workplace in operation.
EBITDA in our distribution business carried out by our subsidiary Codensa increased 11% or %14 million as a result of the growth in residential consumption and tolls that are recovering in call Bogota our concession area.
Energy losses remained almost flat due to the mitigation effort undertaken by the company. During the quarter, Codensa clients increased by 23,000 or 2% reaching about 2.7 million customers.
Let’s look at Peru on slide number 12. EBITDA increased by about 20% with a positive impact of $9 million in terms of currency effect, in particular in local currency, generation EBITDA increased by 10% or $7 million. This improvement is mainly explained by higher energy sales prices which more than offset the lower hydro production thanks to the addition of the 302 megawatts thermal capacity coming from last year capital increase. This capacity includes the recently development – recently added 180 million megawatts pertaining to Russia.
This division, EBITDA increased 15% or of $6 million. This is due to higher physical sales increasing by 83 gigawatt hour less percent less energy losses. Edelnor clients increased by 12,000 or 1%, reaching an amount of 1.3 million plus customers.
Let’s now move to Argentina on slide 13. EBITDA decreased by about $63 million and was negatively affected by an $46 million one-off effect related with the overrun cost generated due the last heat wave we experienced in Buenos Aires.
In local currency, generation EBITDA increased by $19 million due to Costanera’s increased margin. This is mainly the result of the positive effect of Resolution 95 of the Energy Department, which implies a Cost Plus Compensation Scheme for generating companies.
Physical sales increased by 31% reaching 3.7 terawatt hour posted by Costanera and El Chocón. Distribution EBITDA increased by $106 million mainly reflecting the recognition of last year finds. Extra hours related to work overtime and higher cost on network equipment and maintenance.
Finally, let’s move to the cash flow analysis on slide number 14. During the first quarter 2014 cash flow from operations amounted to $473 million. This cash was used during the period for CapEx, amounting $428 million, of which 60% was invested in distribution and 40% in generation, spread by approximately 60% maintenance and 40% expansion, dividends of about $255 million and interest payments of $73 million.
Enersis continues to show a strong financial position, and our liquidity position amounts to $3.1 billion and allows us to easily service debt maturities through 2016. Please refer to the annexes for further details.
Thank you very much for your time and I will now hand over the call to the operator for the Q&A session. Glenn?
[Operator Instructions] Our first question comes from the line of Charles Fishman with Morningstar. Please proceed.
Charles Fishman – Morningstar
Hi. Thank you. The new emissions tax in Chile starting in 2017, since about 50% of your generation is hydro I would think this tax might actually net-net be a benefit to Enersis. Is my thinking correct?
Thanks Charles. Well, first of all, this tax reform hasn’t been approved yet. And probably this tax, this carbon tax is going to prove very interesting one in terms of negotiation in the Congress. But yes, you are correct that since most of our hydro, most of our production is hydro and that is not going to be taxable, the results we are not clear which they maybe, but my understanding as the bias is could be, at least not negative.
Charles Fishman – Morningstar
Okay. And then my second question is the Peru generation acquisition that you recently announced. The other 41% ownership is there an opportunity to acquire additional ownership for that company or does Peru regulation prevent you from doing that or is it individual shareholder, a significant shareholder, what is the situation there?
Right, first we have to clarify that it’s not 41. The 41 is the minority interest that is within the chain, the property chain that we have because the other parts of the company – let me express – we are buying 39% of [indiscernible] is the owner of 57% or 67% of Chile. The other part of Chile 16% is owned by a minority interest in mainly a French contract – Peru and French contract and the rest is owned by Endesa Chile, our subsidiary in which we own 60%. That’s why after this purchase, the only part that we can buy directly is the 16%. The other part is owned by Endesa Chile. If we – we can grow after that 16%, it is through a market operation, but that hasn’t been established yet.
Charles Fishman – Morningstar
Okay. Thank you for clarifying that. That was all my questions. Thank you.
Our next question comes from the line of Ezequiel Fernández with Scotia. Please proceed.
Ezequiel Fernández – Scotia
Hi good morning. Thank you for taking my call. I would like to ask three questions about the Brazilian operations. The first one is related to the recent K0 auction, which was carried by VNL with a high degree of success. I wanted to know if Coelce and Ampla were able to reduce their spot exposure in this auction. And also if you could provide some color on the contracted EBITDA of both [indiscernible]?
The second question is regarding Coelce, I was under the impression that the export – that the spot market exposure for Coelce was quite lower than for Ampla, but we feel great EBITDA shrinking while Ampla was, in at least in reality was flat?
And the third question finally, I would like to know about any updates that you might have on the Ampla tariff revision, especially about new dates or any changes to their preliminary moving and beginning of the year? Thank you very much.
Okay. Thank you, Ezequiel. in terms of the exposure that our companies have on the spot market it is you stated very clearly Coelce is less exposed than Ampla. But both are very – have a very low exposure against the rest of Brazilian distribution sector.
Coelce is at roughly speaking 2% and Ampla 7% of the – as you can see. Those are rather minor effects. And in the case of Coelce that 2% is very, very low. And it didn’t change in the – during the last auction.
And in terms of Ampla we are under the – we don’t see any development different and once that we have been watching as today we don’t see any radical change.
[Operator Instructions] There are no other questions at this time. So, now I do turn a back over to the speaker for closing remarks.
Thank you Glenn. Well, since there are no more questions, I would like to thank you for your time and attention. Remember that our IR team will be glad to assist you in any further questions you may have. Have a nice day and goodbye.
Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a wonderful day.
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