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Endesa SA (NYSE:EOC)

Q2 2014 Results Earnings Conference Call

July 28, 2014 10:00 AM ET


Fernando Gardeweg - Chief Financial Officer


Enrico Bartoli - MainFirst

Gustavo Fingeret - Itau


Good morning, ladies and gentlemen and welcome to the First Half 2014 Endesa Chile SA ADS Earnings Conference Call. My name is Michelle and I will be your operator for today.

At this time, all participants are in listen-only mode, we will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this call 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 Endesa Chile and its management with respect to, amongst other things, Endesa Chile's business plans, Endesa Chile's cost reduction plans, trends affecting Endesa Chile's financial conditions 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 Endesa Chile 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 or interest in the United States or elsewhere, adverse decisions by government regulators in Chile or elsewhere, and other factors described in Endesa Chile's Annual Report on Form 20-F, including under Risk Factors.

You may access our 20-F on the SEC's website [].

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of that date. Endesa Chile undertakes no obligation to update these forward-looking statements or 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. Fernando Gardeweg, Endesa Chile’s CFO. Please proceed.

Fernando Gardeweg

Thank you (inaudible). Good morning everyone and welcome Endesa Chile conference call to review first half 2014 results. I am Fernando Gardeweg, CFO of the company and joining me today is Mrs. Susana Rey, Endesa Chile Investor Relations Director and our IR team. As always, we will be available to assist you and answer any questions you might have after the call.

First of all, on slide two, I would like to highlight the most important line items for the period. One, 12% percent increase in operating revenues, mainly in Chile, Colombia and Peru; two, 7% increase in hydro generation due to better water availability in Chile and Argentina; three, as a consequence, consolidated EBITDA increased 11%; four, net income attributable to Endesa Chile shareholders decreased 7%, primarily due to the foreign currency exchange difference valuation; five, on April 22, 2014, Endesa Chile acquired an additional 50% stake in Gas Atacama. As a result of this transaction, this company became part of the group’s consolidation agreement; six, additionally during the first half of 2014, Endesa Chile began the construction of the pass-through hydropower plant Los Cóndores with 150 megawatt installed capacity located in the Maule region in Chile. These two transactions will amount an investment of around $970 million.

Let’s move to slide three, the most important consolidated changes are as follows: Net income from our controlling shareholders decreased by 7%, amounting to $168 million, primarily due to 13% higher cost, primarily due to a 68% increase in energy purchases, mainly in Chile as a consequence of the stoppage of interruption of Bocamina II; 24% higher net financial expenses mainly due to a higher negative foreign currency exchange rate different in Argentina; 42% lower associated companies result mainly due to lower results in Endesa Brazil and the consolidation of Gas Atacama; and 8% decline in taxes mainly to booking of Endesa Chile tax credit received from abroad offset by 12% higher revenues, mainly due to higher average energy sales price in Chile, Colombia and Peru, both affect results 11% higher consolidated EBITDA.

In slide four, you can see the contribution of each country to our EBITDA during the last 12 months for the total amount 43% came from Colombia, 33% from Chile, 17% from Peru and 7% from Argentina. Our operations in Brazil are accounted for under the equity method and contributed a total of $131 million.

In slide five, regarding our commercial policy. In a context of volatile electricity prices, we continue to carry out our consistent forward sales strategy to final customers, mainly at fixed prices which allow us to optimize and standardize our market. In our companies, we construct around 70% of generation expected for future periods. This percentage of energy contract optimizes the margin and minimizes risk exposures, primarily in relation to ideal capacity. We are normally the system’s lowest cost producer in all ideal conditions.

During this first half, the company sold only 1% of the spot on the spot market in Chile. On the other hand, in Colombia, Peru and Argentina spot market sales amounted to 29%, 80% and 90% of total energy sales respectively.

In slide six, let’s look at our strong financial position. We have a comfortable debt maturity profile with only 26% of our total debt maturing in the next two years. We have $441 million in cash and cash equivalents plus $495 million of committed and undrawn revolving credit lines, both local and foreign. Of our total debt of $4.4 billion, 89% came from Chile and Colombia.

In slide seven, we see that free cash flow decreased by 21%, amounting to $550 million as a consequence of lower EBITDA, higher net financial result and payment for addition of fixed assets.

In slide eight, our leverage defined as total debt of our equity amounted to 0.96 times or an 8% higher compared to 2013, due to then Chile $400 million bond issuance in April. Financial coverage reached 4.7 times, lower than the 5.4 times recorded in June 2013 as a consequence of the lower EBITDA and higher financial expenses due to the exchange rate variations.

Now, I would like to make a brief summary of our operating performance on a country-by-country basis starting with Slide 9. Argentina; EBITDA from our Argentinean operations increased 98% amounting to $46 million, primarily as a consequence of Endesa Costanera combined availability contract payment.

Regarding the Argentinean energy sector, let me highlight that the energy demand in the system increased 3% reaching 62,518 gigawatt hours and price continued to be kept at 120 Argentinean peso per megawatt hour, approximately $15 per megawatt hour. As a consequence of resolution 240 of 2003.

In Chile, slide 10 EBITDA from Chilean operations decreased by 28% amounting to $103 million, mainly due to higher energy purchases as a consequence of the stoppage of Bocamina II deriving the Chilean energy sector by ecological situation for the period shown 80% probability of affluent energy.

Reservoir levels accumulate 800 of steady gigawatt hour of energy equivalent a 110% increase compared to the first half of 2013. With respect to the maximum energy storage, the system reservoirs are currently approximately 8% of capacity reflecting the ideology. Total physical energy saving Chile were 51,970 kilowatt hour, 2% higher than first quarter 2013.

Regarding prices, average spot price in the second quarter in the ship was $161 per megawatt hour, a 10% decrease compared to 2013.

Slide 11 Colombia. Colombian EBITDA increased by 20% reaching $430 million due to 27% lower fuel cost, due to lower thermal generation as a consequence of higher water availability. Regarding the Colombian engine sector accumulated demand in the system was 41,604 terawatt hour which represents a decrease of 3% compared to 2013.

Average spot price for the second quarter was $137 per megawatt hour, 57% higher than the same period last year.

In Peru slide 12. Peruvian EBITDA increased by 21% reaching $157 million due to higher energy sales as a consequence of higher physical sales to regulate and non-regulate customers. Regarding the Peruvian energy sector electricity demand increased by 6% reaching 18,617 gigawatt hour which continues to be one of the most highest growth rate in region. Regarding prices marginal price reached $26 per megawatt hour representing an increase of 17% with respect of the second quarter 2013.

Finally, in slide 13. (Inaudible) EBITDA decreased by 18% reaching $226 million mainly explained by lower results in the distribution business. We remind you that the (inaudible) is accounted for under the equity method and our 37% (inaudible) amounted to $131 million over the last 12 month. Regarding the (inaudible) sector demand for the (inaudible) was 236,142 gigawatt hour representing a 3% increase compared to same period of 2013. An average spot price reached $288 per megawatt hour 137% higher than 2013.

Now let me focus on our investments during the period. On slide 14, El Quimbo our 400 megawatt installed capacity isolated volume continues its construction under schedule. We expect to start operation during the first half of 2015 and in slide 15, the (inaudible) consists of the all generation chain of the (inaudible) River which will result in the regional of 145 megawatt of installed capacity that will permit greater generation of approximately 482 gigawatt hour a year. As of the end of the June, 4 units had come to service adding a total net of 128 megawatt. The full optimization is expected to be complete by December 2014. These two project under will represent almost 20% of the total capacity of Columbia.

In slide 16, regarding our investment recently approve. We want to highlight those countries (inaudible) power plant under construction located in Maule region in Chile that will add 450 megawatt of installed capacity. On the other hand on March, we acquired the remaining 50% stake of GasAtacama, the thermal power plant located (inaudible) region in the Chilean [sink] has 780 megawatt of installed capacity.

With this transaction the Chile EBITDA growth increased an original 3% or $21 million and the 50% equity was revaluated in $39 million. This effect is shown as net income from all investments.

Regarding allover projects under study in slide 17, our pipeline increased 1,688 megawatt, which represents 12% of the total capacity of Peru from which 89% is located in Asia.

Before ending this conference call in slide 18, I would like to highlight the most important thesis during this quarter. One, better operating results for the first half of 2014. Consolidated operating margin increased 11% mainly due to better operating revenues result in the second quarter as a consequence of higher generation in all the countries where we operate. Two, net income affected by non-operated assets, net income attributable to Endesa Chile shareholders decreased 43%, primarily due to a greater negative foreign currency exchange difference affect and lower results in Endesa Brazil and GasAtacama.

Three, [civil law] affected. Chile, [civil law] the relative situation in Chile improved last quarter, it continues to be poor. We have been experiencing a slight normalization in the Chilean hydrology, expecting to end 2014 as normal. However, as we have experienced almost four consecutive dry years, Chile’s most relevant reservoirs remain in a dry situation and will need two consecutive raining years to reach normal levels again. Demand continues to increase and we still have a fragile transmission system industry.

On December 16, 2013, the local court of conception issued an injunction after several unions working for small scale fisheries, raised some environmental issues caused by Bocamina II operations. The conception order operations stopped the Bocamina II thermal facility. Since the date of this issuance, until now the plant has been shutdown.

On June 4th Endesa Chile and the fishers appealed to the Supreme Court of Chile. Endesa Chile is waiting for the current resolutions that could take up to two months from the appeal date but there is no certainty about the solution timing.

Five, investment [rates] approved, on April 22, 2014 Endesa Chile acquired the remaining 50% stake of GasAtacama and during July, we started with the construction of the pass-through hydropower plant, Los Cóndores, with 150 megawatt of installed capacity located in the Maule region in Chile. These two transactions will consider an investment of around $970 million over the next year.

Diversified portfolio in operations in five countries allow us to diversify rate to reach into each country. We continue to profit from our current commercial policies and an efficient mix of generation assets. Even though, we face a difficult scenario, we improved the operating margins in all the countries which we operate and increased -- we increase our EBITDA by 11%.

This concludes our review of Endesa Chile financial results for the first half 2014. Now I would like to answer any questions you may have. Operator?

Question-and-Answer Session


Thank you. (Operator Instructions). The first question we have comes from the line of [Nicholas Shield from Santander]. Please go ahead, our line is now open.

Unidentified Analyst

Good morning and congratulations for the result of the second quarter. My question is regarding GasAtacama, I would like to know your expectations for this operation. How are you planning to supply the gas for this power plant and if you are expecting the future or in the near-term to get new contract for this operation? And also if you have any expectation for synergies in the case of GasAtacama? And my second question is regarding hydrology. I would like to know your expectation for the third quarter. And if you have any estimate for the (inaudible) you have seen in Chile? Thank you.

Fernando Gardeweg

Well regarding GasAtacama, we bought this company two months ago. We are looking for synergies; we are looking for new contracts and we expect that the operation of this new power plant will be under the business standard we carried before buying this power plant. So we expect that to have synergies as a consequence of the operation that we will make together with this company.

Regarding to the hydrology, we had a very good June month with our huge hydrology, a very, very [best] July month but our expectation for August and rest of the year is that the situation will [Technical Difficulty].


Yes, that’s much better. Please go ahead.

Unidentified Company Representative

Did you get my answer?

Unidentified Analyst

Yes, yes, I think I listened to the second part of the answer.

Unidentified Company Representative

Well, regarding GasAtacama, as we bought the company we’re looking for the synergies that we can obtain operating together with this company. We are looking for a new contract for…

[Technical Difficulty]


Yes, that’s back again now. Hello? Yes that’s much better you’re clear again now.

Unidentified Company Representative

Yes, okay. Nicholas did you get the first part of the answer…

Unidentified Analyst

Yes, yes, I really listen also the question of the hydraulic yes I could understand.

Unidentified Company Representative

Okay, we hear you very well anyway.


Okay. The next question we have come from the line of (inaudible) Fernandes. Please go ahead. Your line is now open.

Unidentified Analyst

Hi, good morning everybody. Thank you for taking my question. Three questions actually if you don’t mind I would like to go one-by-one. With the gas generation costs in Chile have going up from more or less 80 megawatt to 95 quarter-over-quarter. I wanted to know if that’s more or less okay which you have and what should we expect going forward?

Unidentified Company Representative

Did you want make it three question or one-by-one?

Unidentified Analyst

Okay. Okay, I can ask you three questions right now. Well, I'll repeat the first one. We estimate that gas generation costs in Chile have going up from $80, $95 per megawatts quarter-over-quarter. We wanted to know a little bit why that happened and what should we expect going forward in terms of gas generation costs in (inaudible)? And then also in the fix system. Is this any model ready by the Consorcio contract or when should we expect that contract to start demand in energy? And the third question is related to the Colombian operations. It seems that more or less you were able to will to sale energy at 160 megawatt in the spot market also in (inaudible) only paid $75, so also in the spot market for chases. I wanted to know a little bit most behind this great market, I mean again this different of sales and purchases in the spot market? Thank you very much.

Unidentified Company Representative

[Technical Difficulty] Okay, regarding your first question we have a higher fuel cost due to greater hot fuel generation of open cycle power plant and that’s the reason for impero. Regarding for Consorcio we expect to begin this operation in this month or maybe next month so we are waiting to supply the energy contract that we have with this company.

And regarding the Colombian question that you asked me please give me one second. Regarding to the Colombian operations, this is a very active market. We participate with our assets and we have huge water availability so we can buy and sell at different places and we can advertise between the energy that we have and the energy that we sell. That’s the reason of the margins that we obtained in the Colombian operations.

Unidentified Analyst

Thank you very much, that was very clear. Have a good day.


The next question we have come from the line of Enrico Bartoli from MainFirst. Please go ahead, your line is now open.

Enrico Bartoli - MainFirst

Hi, good morning. Two questions on my side. First of all could you please update a bit more in detail about the situation of Bocamina II? And if you can give us a hint of the impact and is the impact from the stop of the plan that you add in the first half?

Secondly, back on the margins on Colombia, if I made right calculation the unit margin was up very significantly in the second quarter. Could you be a bit more precise about the reason if these kind of margins can be sustainable over the next quarters?

And last, if you can give us the contribution from GasAtacama in the second quarter? Thank you.

Fernando Gardeweg

Yes, okay. Regarding to Bocamina II, on June 4, Endesa Chile has appeal to the Supreme Court of Chile and currently Endesa Chile is waiting for the current resolution that will take two months since the appeal.

But with there is nothing currently about their solution timing. The effect that caused in our result of that is a bit similar that we mentioned to the superintendency here. So we have not changed the effect, that this more than around $1 million per day, depending on the spot prices and the hydrological situation of the system, especially our units.

Regarding the operation in Colombia, we have been -- have a very successful commercial policy. We were very successful in the contracts that we signed and we have very good hydrological situation. So we do not expect to repeat again these margins. I think that this situation was caused by not one time affect but with a serious factor that coupled and affected in positive manner our operations in Colombia.

And the last question that you asked me about?

Enrico Bartoli - MainFirst

The contribution from GasAtacama.

Fernando Gardeweg

The contribution from GasAtacama GasAtacama contribution first half was mainly due to this part of this power plant. So this contribution depends despite that the plant will be in the second quarter we expect to have a similar situation in the first half of this year. But we are looking for contract that caused us to use more this power plant. But till now, we expect the similar effect for the first half.

Unidentified Analyst

Thank you very much.


So you have no further questions at this time. (Operator Instructions). We have another question and that comes from the line of Gustavo Fingeret from Itau. Please go head. Your line is now open.

Gustavo Fingeret - Itau

Hi guys, good morning. I have two questions; the first one is regarding HidroAysén, what are your expectations on that? And what we should expect over the next couple of quarters regarding turning down or not the project? And the second question is related to hydrology over the next I would say 12 months although the second half of the year should be much better on a situation what we should expect on the first half of 2015? Thank you.

Fernando Gardeweg

Regarding to HidroAysén on June 11, 2014, the Chilean government decided to cancel the permit to develop the HidroAysén hydro plant. The main reason behind such decision relates to the environmental impact that such plant will have had. Currently, we are analyzing the notification received by HidroAysén on July 15, 2014.

Regarding to hydrology, well nobody can make forecast for more than six months or even three months. We have seen a very -- hard situation during July but we are facing a better situation this week and we expect better situation during August. But with this situation, we expect to have 2014 as a normal year. For the next year, we don’t have expectation yet because those -- the report, the next year will be affected by the [Erminio] effect and we don’t have any clarity about the situation of the [Erminio]. And the situation will affect as the month in season, but we don’t have a clear how much now we will have because we are in the middle of the rainy season. As I mentioned in this conference call, we expect to have a normal year this year and we don't have any forecast for the next year yet.

Gustavo Fingeret - Itau

Okay then sorry. Let me add one question to the first one point is, when do you expect to make a statement regarding a hydro license?

Unidentified Company Representative

Well, we received the notification and a recent company has evaluated the answer and they will answer in the period that they have to answer. We don’t have actually clear when it would be made. But in the process of certain data, I think that's one month after receiving the notifications.

Unidentified Analyst

Okay. Thank you.


At this time, I would like to turn the call back over to Mr. Fernandes for closing remarks. Please go ahead.

Fernandez Torres

Thanks Mitchell. Since there are no final question. I would like to thank you for participating in today's conference call. Did you need further assistance, our Investor Relations seen will gladly a few. I also invite you to visit our website, will you can obtain the most relevant data concerning our company. Our website, we have also post the complete set of financial statements. Thank you very much.


Thank you for you all to participation in today's conference. This concludes the presentation. You may now disconnect. Thank you for joining and enjoy the rest of your day.

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