Enersis S.A. ADR (NYSE:ENI)
Q3 2010 Earnings Call
October 28, 2010 11:00 am ET
Alfredo Ergas - CFO
Diego Moreno - Bank of America Merrill Lynch
Cristian Jadue - Santander
Good day ladies and gentlemen and welcome to the Third Quarter 2010 Enersis S.A. ADS Conference call. My name is Veronica and I will be your operator for today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of the conference. (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 it’s management within respect to, among other things, Enersis’ business plans; Enersis’ cost-reduction plans; trends affecting Enersis’ financial condition or results of operations, including market trends in the electricity sector in Chile or elsewhere; supervision and regulation of the electricity sector in Chile or elsewhere; and the future effect 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 the 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 20F under SEC’s website www.sec.gov. Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of their dates. Enersis undertakes no obligation to update these forward-looking statements or to disclose any development as a result of which these forward-looking statements become inaccurate.
I would now like to turn the presentation over to Mr. Alfredo Ergas, Enersis’ CFO. Please proceed.
Thank you very much. Good morning to everyone and thank you for participating today in our conference call to review the performance of Enersis Group for the nine-month period ending September 30, 2010. My name is Alfredo Ergas, CFO of Enersis and with me are Ricardo Alvial, Investment and Risk Director; Mr. Rodrigo Perez, our Head of Investor Relations, (inaudible).
I would like to highlight some important events that have taken place this year. First, we continue evidencing a strong growth in electricity demand in the five countries in which we operate specially in Brazil and Peru. This increasing demand has been largely supported by the strong economic activity experienced by these markets.
The performance in Latin America economies even under the financial stress experienced in the worldwide basis during this year reveals a clear sign of the strong demand resilience and economic activity. So these are the basis for us to expect an improving trend towards the next few quarters in terms of revenues and demand. Secondly, this increasing demand in every country bring force the necessity of accounting with additional capacity, opening of opportunities to new projects.
Consequently, last September, we proudly announced the construction of a new Hydroelectrical plant in Colombia named El Quimbo with an investment higher than $800 million. The new facility will have the installed capacity of 400 megawatts and will generate nearly 2,200 gigawatts per year. In this way, our subsidiary Emgesa will be in a very good position to obtain important benefit coming from the sustained increase in demand in Colombia. And this action is confirming our corporate goal of developing products of a solid basis rather than just being bigger.
Thirdly, good to highlight that our generation asset located in Chile continue to operate with not interactions since the earthquake with the sole exception of our 128 megawatt thermal (inaudible) Bocamina in the southern part of Chile. In this respect I’m glad to inform you that after our recovery program to repair damage, Bocamina I will resume operations in the coming days.
Fourthly, continuing our deep commitment in terms of supplying clean energy for the growth of the country, during the fourth quarter we will deliver the second round of answer to the environmental authorities in connection to our project (inaudible) in the southern part of Chile. As part of our corporate goals, we have maintained a prudent financial management. This can be seen in a good label of liquidity.
In fact, we closed the quarter with over $1.5 billion in cash and cash equivalent on a consolidated base plus committed lines, credit lines for $900 million and uncommitted credit lines for an additional $577 million, all of those credit lines available for Enersis and it is achieving. All these positive financial measures have been recognized by the rating agencies. On September 29th, Moody’s placed the Baa3 senior unsecured rating of Enersis under review for a possible upgrade.
And now let me move into some specific topics in our business. Let’s talk about distribution. Main drivers of the result from our distribution business line were a 5.8% increase in physical sales, the addition of 380,000 new clients as part of our natural growth, and a strong increase in demand in the five countries where we operate with remarkable figures in Brazil and in Peru.
Let me talk about country-by-country. In Brazil, an increase of 50% in EBITDA explained by a sustained increase in demand experienced by our subsidiary in connection with a high yield level of economic activity, which pushed up physical sales, 6% in Ampla and almost 15% in Coelce. Also better sales price in local currency and higher revenues on tours.
In Peru, the EBITDA increased 3% mainly as a result of 7% of higher physical sales and increase in revenue and other relative services. In Colombia, the EBITDA also increased 1% basically explained by a 3% of higher physical sales in connection with 69,000 new clients. This small improvement is also explained by a decent comparison base because of the deconsolidation of revenue from the retail business unit that we sold last year Codensa Hogar.
In Chile, we registered a decrease in our EBITDA mostly due to lower tariff and higher effective costs and lower sales on other services. These negative factors were basically offset by a 3.8% of higher sales related to increase in electricity demand experienced during this year.
In Argentina, also showed a lower EBITDA mainly as a consequence of an increase in megawatt cost and less efficient mix of purchase and sales. Also, we have an increase in personnel expenses. These negative factors were partially compensated by a 4.3% of higher sales.
Summarizing the distribution business performance, I have to highlight improvement in operating result from our Brazilian subsidiaries and this positive result from our distribution subsidiaries must be understood in the context of our sustained increasing demand all over our six concession areas where we operate.
Let’s move to our generation business. Comparing the third quarter to the second quarter, generation in terms of physical sales increased 12% while energy sales increased 5%. We expect that this trend would be maintained during the fourth quarter.
In Brazil, the EBITDA decreased 5.6% basically explained by the lower revenues from our transmission subsidiary, CIEN. Let me remind you that in 2009, the company transported electricity throughout Argentina and Uruguay, while in this year has transported a few amount of energy only to Argentina starting on June.
However, in context with this negative outcome, our subsidiary Fortaleza increased by 25% its operating income mainly due to a 6% increase in the average selling price. Likewise, Cachoeira Dourada increased 32% its operating results, mostly explained by 6% of higher physical sales and 18% in higher selling price.
In Peru, the EBITDA decreased 4% due to higher cost of energy purchased because of increasing fuel cost related to the increase in payment duration and also due to the absence of non-recurrent provision related to distribution without contract register of September 2009.
In Colombia, we register EBITDA mostly in line with the figures recorded as of the last year. The main drivers in Colombia of the result were the higher cost of fuel transport, almost completely offset by an 19% increase in average prices experienced in the country given the lower hydrology of the period especially during the first half.
In Chile, EBITDA decreased 30% mostly due to a 9.3% of lower average prices mostly because of new long term contracts auctioned between 2006, I’m sorry and 2009. Because those average prices of these contracts are lower than some spot and margin of prices recorded during the last year. Higher cost related to increased energy purchased as required by the lower hydrology, which implies a higher production costs.
In Argentina, registered a 3% decrease in EBITDA mainly as a consequence of our 34% increase in fuel cost, 11% of lower physical sales and these two (inaudible)were basically compensated by a better sales price mix.
The first nine months of 2009 and the same period of this year have been particularly different in many aspects. The second one recorded extremely severe earthquake and also acquired different hydrology with all their implications. Because of that we believe that the better way to identify the real trend with each period is to use a quarterly approach compared to the second and the third.
So if you compare the second and third of 2010, you will notice that we have achieved a much better performance in both generation and distribution business. This conform that we have been saying about a good expectation we have on the second half of this year taking into account the difference.
Market summary, the Chilean stock market of the four most other markets are measured by their most relevant indexes. In fact, when the Selective Chilean Index, IPSA increased 34%, (inaudible) decreased 1%, Dow Jones 3.5% and Standard & Poor’s 500 decreased 2.3%. In this active market, Enersis shares continue to be one of the top five most traded shares confirming the high liquidity of our stock.
Let me tell you about some key topics to have in mind. In Brazil as most of you maybe aware on September 8th Enel launched the third type revision cycle for Brazilian distribution companies. The main issue for this revision was a decrease in the regulatory work. In this respect we have to say that the overall market consensus hope our regulatory work over the initial proposal of Enel. We will closely monitor this process and will keep you informed.
On the other hand the positive trend exceed by the overall economic activity has been boosting the electricity demand in the country and therefore the country needs to add new store capacity. Hopefully, the authority will give the proper incentive to participate of this good market trends.
In Chile, (inaudible) and stability of the economy, particularly in this industrial sector has been the main driver of a bigger demand of electricity. During this year it is expected to see new big industrial and commercial projects being developed, a positive evaluational factor to boost the demand on electricity.
In Colombia, hydrology has started to recover reaching average labels, so the impact of the late rainy session will be noticed rather later this year. Furthermore, demand is gaining a strong momentum and we are committed to serve this increasing demand offering new capacity to the Colombian system. In this context, the beginning of El Quimbo project is a strong signal for our commitment with the country and with our shareholders adding profitable projects to our existing installed capacity.
In Peru, considering the positive trends evidenced by the Peruvian economy during the last few years, our distribution and generation subsidiaries have prepared to properly satisfy the growing demand.
Now and before ending this conference, let me summarize some key factors that explain our results. First of all, the addition of more than 380,000 new clients that confirm our organic growth. The important increase in demand in our concession areas, our better financial income and strong liquidity, a solid rate and risk opinion by the rating agencies reinforced the decision by Moody’s to place a rating classification under review for a possible upgrade.
A detailed analysis 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 Relation department, they will be glad to assist you. Thank you very much for your attention.
And now I would like to pass the call to the operator for your question.
(Operator Instructions). And your first question comes from the line of Diego Moreno from Bank of America Merrill Lynch. Please proceed.
Diego Moreno - Bank of America Merrill Lynch
Hi. I have two questions, in fact, one of my question, it appears that you have a drop in Ampla result in 3Q and 2Q when compared to what we have seen in other quarters, that is any extraordinary item occurring to that and the other one is that you can share any of your expectations from the Coelce tariff revision that we will start in April 2011? Thank you.
Thank you, Diego. The answer to your first question, we do not have any special effect. And talking about the revision in Coelce from the next year, I think, as I mentioned during my speech, of course, it will be the main thing, you will the read revision about the work and we expect that they will be better than what we have known until now. And the second thing it is that we expect that in Brazil, the revision will be a technique and as professional as it has been in the last, all of the last process. So we expect that the authorities, they would consider the rate of growth of our business and the new watch that we expect they will be much better than what we saw in the press report.
(Operator Instructions) And your next question comes from the line of Cristian Jadue from Santander. Please proceed.
Cristian Jadue - Santander
Hi, Alfredo, Ricardo, good morning. I’m Cristian Jadue from Santander. I want to ask about your long-term view of the resident distribution company after the announcement of the regulatory (inaudible) of the preliminary works that are much lower than we were expecting. Do you expect that energy loss reduction will be able to offset the impact of lower tariffs?
Thank you for your question. Actually, I think, it’s one of the things that we expect that working in reducing the losses we’ll be able to compensate what happened with the adjustment in the tariff and in the work if at the end the result will be lower compared to what we have right now.
At this time, there are no further questions. I would like to hand the call over to Mr. Alfredo for closing remarks.
Okay, thank you very much. Thank you, the reason for being here, Ricardo, Rodrigo and then for all of you to be in this conference call. Let me just remind you that our commitment to keep you properly informed and we are deeply convinced that to a degree that you understand Enersis more, you will be better value our company. We expect that in our next conference call, we can show to you all of our efforts to get a good result and a good performance on our company. Thank you very much.
Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.
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