Enel Chile SA

NYSE:ENIC

Earnings Call Transcript 2018-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to Enel Chile's First Quarter 2018 Earnings Conference Call. My name is James, and I will be your operator for today. [Operator Instructions] As a reminder to all participants, this conference is going to be recorded. [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. 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 are described in Enel Chile's press release reporting, its first quarter 2018 results, the presentation accompanying this conference call and Enel Chile's annual report on Form 20-F, including under Risk Factors. You may access our first quarter 2018 results press release and presentation on our website, www.enelchile.com, and 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 dates. Enel Chile 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, except as required by law.

I would now like to turn the presentation over to Mr. Raffaele Grandi, Enel's Chile's CFO. Please proceed.

[Raffaele Grandi, executive]

Good evening, ladies and gentlemen, and welcome to Enel Chile's conference call to review our results as of March 2018. I am Raffaele Grandi, CFO of the company. Joining me today is Ms. Susana Rey, Enel Chile's Head of Investor Relations. We invite you to follow along with the presentation uploaded to our website. And as always, we will be available to assist you and answer any questions you may have after this call.

We like to start reminding you that Enel Chile's financial statement includes 3 months of real operation for 2017 and 2018. No pro forma financial statements are needed for comparison for our first -- from now on.

Now I will highlight the most important changes in our operations during this first quarter. Enel Chile's reported EBITDA of $290 million, an increase of $9 million mainly explained by $9 million of higher EBITDA in the distribution business. Net income before taxes, excluding the positive extraordinary gain from the sale of Electrogás in February 2017, maintained stable, amounting to $117 million. As for group simplification, during this quarter, the reorganization process finally was completed, thanks to the support of the majority of the shareholders. This April 2, Enel Chile will consolidate 100% of Enel Green Power Chile, 94% of Enel Generación Chile. The main drivers in our generation business were EBITDA maintained stable, driven by a better generation mix; higher hydro generation by 421 gigawatt hours and lower thermal generation by 528 gigawatt hours. Higher sales to nonregulated customers by 430 gigawatt hours.

Regarding our distribution business, EBITDA increased 13%, amounting to $79 million. Regarding margin, net from extraordinary effects, increased by 4%, amounting to $150 million, mainly due to the regulated business. We registered a growth of 3% in our customers that amounted to 1.9 million clients, with an increase in free market sales of 17%.

Before moving to the detailed analysis of our financial results, in Slide 3 I would like to give you some highlights on the market context for this period. Chile's economy will grow around 3.5% in 2018. Growth should strongly recover this year, thanks to a continued turnaround in investment, supported monetary policy and higher private consumption. In addition, strong external conditions should boost exports. However, the economy will remain vulnerable to fluctuation in copper prices and potential labor disputes at key mines.

Electricity demand in Chile recorded an increase of 1%. Energy sales in the system increased 5%, totaling 18 terawatt hours. It is important to mention that in our concession area, sales increased 2%. The average spot price in the system decreased to $76.6 per megawatt hour as a consequence of water availability.

Finally, with respect to the currency, the peso appreciated versus the dollar by 8%, which negatively impacted our generation sales, which are linked to dollar.

Now please join me in Slide 4 to look at operating highlights for our generation business. Installed capacity presented no variations amounting to 6.4 gigawatts. Net production declined by 3%, amounting to 4.3 terawatt hours, driven by 421 gigawatt hour of higher hydro generation, primarily in Ralco and [indiscernible]. 374 gigawatt hours of lower combined cycle generation due to less production by San Isidro I and San Isidro II, 95 gigawatt hour decreased oil and gas generation due to lower generation by Quintero, Taltal; 60 gigawatt hour of lower coal generation of Tarapacá due to maintenance since November 2017 and Bocamina I due to scaling maintenance in January. This is offset by higher generation in Bocamina II of 96 gigawatts hour. Please note that we have seen a recovery of hydrology in the last quarter of 2017 and first quarter 2018, improving the level of our reservoirs. Physical energy sales decreased by 3% or 148 gigawatt hour as of March 2018, primarily due to 129 gigawatt hour lower sales to spot market due to lower energy dispatch.

Now regarding our operating highlights for our distribution business. Electricity distributed increased by 2% that is 100 gigawatt hour, driven by higher residential customers of 17 gigawatt hour, higher tolls of 125 gigawatt hour, offset by lower sales to commercial customers of 56 gigawatt hour and industrial customers of 25 gigawatt hour. Customer rose by 3% or 50,000 during this period, thanks to residential reaching a total of 1.9 million clients. With regards to our interruption index, the ratio increased by 7% as a consequence of the exceptional rains and snow occurred in June and July 2017. It's because we are considering the last 12 months. If we exclude these effects, SAIDI would have decreased 8%. Energy losses remained stable at 5.1%, very close to technical losses.

Please join me now in Slide 6 to show recurrent gross margin breakdown for our distribution business. Total recurring margin increased 6% in respect to first quarter 2017 due to $4 million of better margin in the regulated business as a consequence of higher sales and a better mix. Free market registered a decrease in margin of $1 million due to a lower average sale price, offset by an increase of 17% of new contracts with free customers and potential free customers inside and outside our concession area. The added value services reduced as a decrease in margin of $2 million as a consequence of lower results in public lighting because 2017 was exceptionally positive here in which we recorded a level of activity higher than normal. Anyway, we are expecting to develop new projects during the year.

On Slide 7, you can see each business' contribution to our EBITDA. Enel Chile's EBITDA increased 3%, amounting to $290 million, driven by generation -- in generation, a little decrease of 1% due to lower sales or $44 million, mostly as a consequence of a lower average sale price in pesos and lower gas sales for $12 million; lower fuel consumption cost for $50 million due to a more efficient generation mix; lower other cost for $12 million, offset by higher transportation cost for $5 million related with those. In distribution, EBITDA increased 13% or $9 million. This is mainly explained by higher energy margins of $4 million, including transportation revenues and expenses, mainly thanks to a better performance of the regulated business; lower OpEx for $5 million, mainly explained by the decrease in extraordinary and lower recurring bonuses granted for employees in the previous period and partially offset by the free training plan initiated the previous year. This is also offset by lower performance of our nonregulated businesses for $2 million related with public lighting.

Now on Slide 8, let me highlight the most important financial consolidated changes as follows: Depreciation, amortization and impairment expenses decreased by 4% to an expense of $64 million, thanks to a smaller asset base. Net financial result increased to an expense of $12 million mainly due to a lower net exchange rate effect as a consequence of the lower positive exchange difference of cash and cash equivalents. Other nonoperating results decreased $169 million due to the sale of Electrogás booked on February 2017. Taxes decreased $30 million, primarily as a consequence of lower tax expenses as a consequence of the sale of Electrogás in 2017. This is slightly offset by higher corporate tax rate. Given all the aforementioned, if we exclude the sale of Electrogás in February 2017, net income attributable to Enel Chile shareholders is in line with previous year.

On Slide 9, funds from operations amounted to $153 million after tax payment, working capital needs and financial expenses. It is important to notice that our positive funds from operations fully covered our maintenance and growth CapEx of $66 million. Regarding our dividends, we paid $91 million, of which $61 million were paid to Enel Chile shareholders.

Now on Slide 10, let's take a look at our financial situation. Total gross debt increased by 122%, amounting to $2,829 million, primarily as a consequence of $1,555 million raised to finance the tender offer for Enel Generación and the weaker price of the Elqui project. Let me highlight that thanks to positive cash generation, we were able to reduce our net debt for $60 million. As of March 2018, we're currently $1,650 million in other current financial assets that in April 2 was used to pay the tender offer of Enel Generación. On the total gross debt, 44%, correspond to bond issuances, both international and local of our generation business and 55% corresponds to bank loans used to finance the tender offer made for Enel Generación. Note that excluding the bridge loan, we do not have an important upcoming maturity with third parties in the next 3 years. We are currently working on the long-term refinancing of the bridge loan.

Please join me now in Slide 11 to focus on our investments. CapEx reached an amount of $66 million. From this total amount, $43 million were used in generation and $23 million in distribution. Maintenance CapEx reached an amount of $20 million, $40 million in Enel Generación, primarily in our thermal facilities due to the purchase of spare parts in Bocamina I and an extraordinary maintenance in Tarapacá. $6 million in energy distribution mainly due to load increase, corrective maintenance and improvements in our grade. Growth CapEx reached an amount of $46 million, a total of $29 million in generation, of which $27 million are explained by Los Cóndores.

Let me comment that we had some technical difficulties related to the geology of the area. We have been implementing different solutions. And let me highlight that we solved them and we keep working, reaching a level of completion of 64%. Additionally, we had some investments in Bocamina II. With regard to distribution, we invested $17 million. This refers mainly to customer connection, smart meters and quality of services.

Finally, on Slide 12, I would like to focus on the key highlights of the quarter. First quarter 2018 results are in line with our expectations. The reorganization process Elqui completed. The effectiveness of the whole reorganization was on April 2, 2018. Speaking of which, we started to consolidate Enel Green Power Chile and the additional 34% stake of Enel Generación Chile. Despite adverse climate conditions characterized by full rain, the last quarter has benefited from a recovery of the hydro condition to such an extent that the hydro production in the first quarter was 0.4 terawatt hour higher than first quarter 2017. This has allowed us to rely less on thermal production and optimize variable costs, thus confirming the opportunities deriving from a diversified mix. Increasing regulated business margin due to an increase in energy sale and number of customer. Finally, we will have a higher dividend payout ratio that was approved in the last shareholders meeting, starting from 55% to 60%.

Let me tell you that we will continue to focus on maintaining our leading position in the energy sector in Chile and to comply with our target, this -- the challenging scenario that we are facing.

This concludes our review of Enel Chile's financial results as of March 2018. Now I will be glad to answer any questions you may have.

Please, operator.

[Operator]

[Operator Instructions] I'm not showing any questions in queue -- actually, we do have a question from Sebastián Ramírez with Toesca Asset Management.

[Sebastián Ramírez, analyst]

I have 2 questions. One is regarding CapEx for Enel Green Power going forward. Can you please update what will be the level of investments that we should expect for the next, let's say, 2 years for the capacity needed to back up the recent energy won in the auctions? And the second one is that if you can give us some color in terms of the type of debt that you're planning to issue for the refinancing of the bridge loan in the Elqui plan. What sort of -- do you want to raise money abroad, local issuance? If you can please give us some color in that, that would be great as well.

[Raffaele Grandi, executive]

Okay. Thank you for your question. With regards to Enel Green Power, our gross CapEx in 2018 and 2019 will be more or less $120 million. And then it will increase in the following year, with more or less $800 million in the period 2020, 2022. With regard to your second question, as you know, we made a bridge loan for $8,550 million, while the financial needs for the Elqui project were $8,750 million, a $200 million worth of finance with our current cash. We are planning to refinance part of this investment with the issuance of a Yankee bond. I would say approximately $700 million, $800 million. And this is planned to be done in the month of June. With regard to the difference, we are still considering whether to proceed with the local issuance or term loans.

[Operator]

[Operator Instructions] As I see no further questions in queue, I'd like to turn it back over to Mr. Grandi for closing remarks.

[Raffaele Grandi, executive]

Okay. Since there are no further questions, I would like to thank you for participating in today's conference call. Of course, if you need further assistance, our Investor Relations team will gladly help you. I also invite you to visit our website at www.enelchile.cl, where you can obtain the most relevant data concerning our company. Thank you very much, and have a nice day.

[Operator]

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.