Enel Chile SA

NYSE:ENIC

Earnings Call Transcript 2019-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to Enel Chile's First Quarter 2019 Results Conference Call. My name is Norma and I will be your operator for today.

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 described in Enel Chile's press release reporting its first quarter 2019 results, the presentation accompanying this conference call and Enel Chile's annual report form on 20-F including under Risk Factors. You may access our first quarter 2019 results press release and presentation on our website, www.Enel.cl, and our 20-F on SEC's website at www.SEC.gov.

Readers are cautioned not to place undue reliance on those forward-looking statements which speak only of the said dates. Chile Enel undertakes no obligation to update these forward-looking statements or to disclose any development as a result of which of these forward-looking statements become inaccurate except as required by law.

I would now like to turn the presentation over to Ms. Susana Rey, Head of Investor Relations of Chile Enel. Please begin.

[Susana Rey, executive]

Good morning, ladies and gentlemen, and welcome to Enel Chile's First Quarter 2019 Results Presentation. I'm Susana Rey, Head of Investor Relations. Here with me are Paolo Pallotti, CEO of Enel Chile; and Marcelo de Jesus, CFO of the company. We invite you to follow along with the presentation uploaded on our website and as always, we will have a question-and-answer session for those on the call.

After this call and Q&A session our IR team will continue to be available to provide you with any detailed information you may need with respect to the figures included in this presentation.

Now, let me hand over the call to Paolo.

[Paolo Pallotti, executive]

Thank you, Susana. In this presentation first I'll provide some I'll provide some highlights, and then I'll take you through operational performance of the period. Then I will hand over the presentation to Marcelo to comment on our financials.

Our first quarter results showed renewable contribution in our generation business. The additional 1.2-gigawatt renewable capacity through EGP consolidation continues to improve our mix and our EBITDA margin on generation, specifically like on Los Condores. We reached 76% level of completion. This means that after 3 years of underground work in complex geological conditions the ongoing excavation of the right-side tunnel that will capture water to carry to the power house has been completed. In infrastructure networks, we continue to focus our investment in improving our [ network procedures ], the [ cold cue ] our services and efficiencies as demonstrated by the improvement of energy losses.

In April as per AngloAmerica's notice, we have reached an agreement for the early termination of the 3 power [ pushers ] agreements for a total amount of $178 million, as per contract compensation close. All in all, our EBITDA growth for the quarter was 98%. Finally, our FFO improvement during the quarter reaching $174 million, an increase of almost 14%, mainly due to the higher EBITDA level and lower cash tax.

Moving to Slide 2, we will see how we located our CapEx, which increased by 44% reaching $86 million in the quarter. Customer CapEx increased mainly due to the construction of 2 new substations as part of our commitment to improve the resilience of our network and therefore for our quality of services. As the management CapEx the last lead decreased during the period. It ended mainly due to the one-off failure maintenance cost related to Tarapaca thermal plant in first quarter 2018. Regarding growth, asset development increased by $27 million during the period, mainly due to Los Condores project, and EGP CapEx.

Following our business plan, future investment will continue to be located to renewable growth and to improve the quality of service to our clients.

In Slide 3 we move to the operating analysis of our generation business. Installed capacity increased by 17% with incorporation of 1.2 gigawatts to renewable capacity coming from EGP, totally amounting to 7.5 gigawatts. Next, production increased by 28% amounting to 5.5 terawatt hours, driven by 0.8 terawatt hour of [ Igar ] renewable generation mainly coming from EGP. 0.4 terawatt hour of [ Igar ] thermal generation mainly coming from gas production.

Physical energy saves increased by 5% or 0.3 terawatt hours, primarily due to 0.9 terawatt hours of higher contracted sales with 3 customers, offset by minus 0.7 terawatt hours of lower consumption of distribution companies mainly associated with immigration of customers to the free market.

Now I would like for regarding our net core business. We are focusing on digitalizing our grid within our customer base, improving the network resilience and the quality of service for 1.9 million clients. In this regard, we saw an increase in our customer base this quarter of 2%, or 45,000, during this period with a total amount of 4.1 terawatt hours representing an increase of 3% of distributed energy.

On the digitalization side, during first quarter '19 we stored 52 new telecontrols totaling 1,784 new controls, sold as their March 2019.

On the resilience of the grid, we saw digital focus on the [ creepy court areas of say and safe ] and we replaced approximately 14 kilometers of cable in our low-tension grids, and more than 13 kilometers of good extension and are in force.

Our interaction in the society in the last 12 months shows a 27% improvement with respect to the last year, below the regular 3 level expected for 2020. SAIDI [ fee ] from the last 12 months also decreased from 1.8 to 1.6 numbers of interruption.

As part of our continuous effort to enhance efficiency, the energy losses have had an important decrease from 3.1% to 4.8%, which is one of the lowest levels in South America.

Now, I will pass the call to Marcelo to comment on our financials.

[Marcelo de Jesus, executive]

Thanks, Paolo. Good morning, everyone. First, on Slide 5, let me present the financial highlights direct with you. revenues increased 40% or $333 million primarily due to the higher energy stales and [ gas formulization ] and extraordinary income on early termination of AngloAmerican's [ TPA ]

Our reported EBITDA was up by $257 million, boosted by the growth in our generation business and the ongoing America one-off impact. Excluding this impact our EBITDA growth reaches $75 million, an increase of 29%.

Attributable net income was up by 149% or $156 million. Excluding under medical one-off impact it's increased 30 more percent in line with the adjusted EBITDA growth.

Gross CapEx increased almost 44%, reaching $86 million, most on asset development on renewables as previous information by Paolo.

Company net debt reached $3.3 billion, explained by the consolidation of EGP and the new debt issued by Enel Chile to finance the tender offer of Enel Generacion. Finally, our cash flow continues strong, reaching $174 million, 14% higher than the figures reported on December 2018.

Now, on Slide 6, let me show you the breakdown and the drivers of our [ variable size ] EBITDA growth. In our generation business, the EBITDA growth was around 140% including $70 million from EGP, $16 million of our conventional generation business, and $182 million from the AngloAmerican one-off impact. Excluding the effect of AngloAmerica, our generation business EBITDA growth was around $87 million with an important contribution from the additional 1.2 gigawatt renewable capacity coming from EGP.

With the respect to the distribution business which includes infrastructure networks, [ analytics ] and retail, EBITDA decreased by $3 million mainly due to the [ retained ] performance and higher OpEx on distribution business.

Holding activities consumed an additional $80 million mainly related to the amortization of hedging costs related with our dollar-denominated debt.

Finally and most importantly, I would like to highlight that EBITDA growth came with a better EBITDA margin which reached 34% including from 31% last quarter, excluding the one-off effect of AngloAmerican. This is a result of our strategy on a more efficient portfolio of assets through additional renewable capacity.

Now, on Slide 7, let's take a different look at the main drivers of our net ordinary income. The appreciation and the amortization reaches $90 million and increases over $32 million basically due to the EGP assets. Financial results and others amounted to an expense of $45 million, an increase of $38 million, mainly due to $92 million of higher financial expenses related to the [ L Project ] and $21 million from the consolidation of EGP Chile.

Tax increased by $57 million as a result of higher EBITDA. Minorities net income decreased by 60% mainly as a consequence of the higher stake of Enel Chile in Enel Generacion, [ being stayed through last year ].

Given all the formation, ordinary income increased 149%. If we exclude the AngloAmerican one-off effect reported net income would have grown 31% in line with the recurring EBITDA growth.

Moving to cash flow on slide 8, FFO in 2019 amounted to $174 million which represents a cash conversion ratio of about 52% of our EBITDA excluding the AngloAmerican agreement [ extraordinary revenues ]. This is an important aspect of our business which clearly shows that cash from our operation is sufficient to fund 100% of our current CapEx and dividends. It still resulted in a net free cash flow of about $40 million.

In January, we saved around $50 million of entering dividends to our shareholders.

Now, on slide 9, let's take a look at our debt. Our growth debt increased by about $740 million versus first quarter 2018 and amounting to $3.6 billion primarily as a consequence of the consolidation of EGP that the new [indiscernible] the region IFRS 16, offset by the amortization of the debt rate to finance to finance [ indiscernible ] [ approach] and serious H-bond amortization among others. Of the total gross debt, 63% for response to bonds and 37% for response to loans. At first quarter 2019 net debt-EBITDA ratio reached 2.1 times net debt to EBITDA.

The average cost of our debt decreased to 5.4% versus Q1 figures mainly explained by the bridge loan for [ the L project ] and better financial positions in the Chile market.

Our net debt 2019 compared to December 2018 adjusted by IFRS 16 decreased by $34 million mainly due to the higher cash generation.

It's worth mentioning that we have a bridge loan for our roughly $200 million, [indiscernible] 2019 which has been already refinanced with a 4-year inter-company loan with [ Essi ] with a known cost of Besides that we have an annual average of $200 million measuring in the next 5 years.

Finally I want to highlight that we seem comfortable with the leverage level achieved this year, considering our strong cash generation as well as the next year's expected EBITDA.

Now I'll turn back the call to Paolo for closing remarks.

[Paolo Pallotti, executive]

Thank you, Marcelo. The energy industry is facing its new [indiscernible] where clients will be key players in this new index, affecting all the segments of the energy value chain.

Companies able to anticipate such transition and to operate with the scale of flexibility would be the ones that we create value for [indiscernible] all the plain clients. In our view, ow our company is well-positioned to play the key role in this context. Our strategy of heading renewable capacity, taking advantage of an EGP asset, is yielding ourselves. Enel Chile's report and EBITDA of $519 million with that occurring EBITDA grow increase of 29%.

Investment in visualization and in the resilience are agreed are improving the quality of service to our clients, as demonstrated by the 27% reduction of [ safety ] which achieved 180 minutes continued to be the lowest level in South America, and by the decrease of 6% in energy losses, reaching 4.8%.

Our EBITDA cash flow conversion is also leveraging on our sustainable growth which enables us to continue to win the mix of our portfolio asset with the solid capital structure. All in all, our performance is then a result of our commitment to consider sustainability as part of our business model, achieving our target in conjunction with the support to the economic and social development of communities and areas where we operate.

With regard to the recent announcement on distribution regulation, we strongly believe that smart meter technology is a necessary and fundamental tool to enable the digitization of the system, and to recognize the empowerment of the client that will be able to play an active role to manage his own consumption and needs.

Talking about distribution return, the government has recently delivered to congress a bill suggesting a 6% discount rate floor. The discussion is in early stage and both chamber and senate would have to analyze the subject. As disclosed in our plan, we have already included a 7% plus tax discount rate as from November 2020 onwards. We are confident in our business plan metrics and portfolio of assets, better leveraging on our long-term profitability, and we continue to work [ hardly ] to deliver our commitment to our shareholders.

Thank you for your attention. And now, let's open the Q&A session in which I will be glad to answer any question you may have.

[Operator]

[Operator Instructions] Our first question comes from Rico Bartoli of MainFirst.

[Enrico Bartoli, analyst]

First of all, on the distribution business, you allotted in press release that there was a decrease in the EBITDA due to some acceleration of maintenance works in the quarter. I was wondering if you expect the normalization of this over the next quarters, if you can provide some case of the impact. And if you can give us a guidance for the EBITDA from distribution for the full year? My second question is related to power generation. If you can give us the contribution from the assets acquired from EGP and actually elaborate it on the margin's evolution in the quarter in the traditional power generation? I saw that [indiscernible] call for action was well, more or less stable. There was an increase in oil and gas production to improvise on the takes from this and some outlook relating to the full year. And the last one is regarding the guidance. If I remember well, we had $1.7 billion guidance for EBITDA this year. If this, you think, is still achievable and to provide some comments on how confident you are about achieving that?

[Paolo Pallotti, executive]

Okay. I let the last question to Marcelo. Regarding the evolution of the costs in generating distribution, there are -- there is one of the -- the main driver is the cost for the implementation of the requirement in the [ normal technical ] and this is included in the adaptation of the tariff that's starting from September 2018. So this is already covered by the additional revenues. Regarding the generation, let me give you some feeling about our performance. The performance in the first quarter is driven first mainly for the increase in the city production that is in the range of 0.3 terawatt hours, and this is mainly driven by the, let's say, [ to use all the Argentinian GAAP ]. We reach, in a [ persistent ] stage in this [ conduction ] approximately in the over 80% of use Argentinian [ gas ] in different [ tax ] in the -- in the production, all-in-all production of 360. Regarding hydro wheat, keep stable the production. We are in line with the first quarter of 2018. Regarding the contribution of the renewable asset, in terms of internal production they are in line with the performance that has been reported in the first quarter even if there was out of the company. So the generations of the EGP is new added in the profile, in the generation profile of the company. And Marcelo?

[Marcelo de Jesus, executive]

Sure. Before talking about our guidance for this year, I just would like to reinforce Paolo's message. And with respect to generation, the contribution of the EGP, and I would say the contribution of renewables, has really been important for our business. Just to give you an idea, out of the $86 million increase in our EBITDA half of it comes from the bare mix of generation assets. So this is really contributing to our growth, really contributing to our improvement of margin which has increased from 37% last quarter to 44%, basically contributed by the mix of these assets. So this is a key element of our business and our strategy. With respect to our guidance, yes, we confirm our $1.7 billion EBITDA for this year and as Paolo said, we have been working hard to deliver our commitment to our shareholders and we do not see any reason at this point to not deliver these amounts by the end of the year.

[Operator]

[Operator Instructions] Our next question comes from Javier Suarez from Mediobanca.

[Javier Suarez Hernandez, analyst]

This is a follow-up after Enrico's question on the EBITDA from the generational business. Looking at the Slide 6 and the increase on the reported EBITDA on the generation business, the thing that we see is an increase -- and correct me if I'm wrong -- of $268 million. So can we assume that roughly half of that amount, that is $134 million U.S. Dollars, is the contribution from new consolidated renewable energy asset? That is the first question to understand if I understood correctly the answer to the previous question. Then the second question is on Slide 3, on the obviously the company's increasing exposure to the free market, that is the consequence of the migration of [ clients into ] the free market. The question would be, can you give us, shine a light on what do you see on the market as a consequence of that migration to the free market and the expectation for the next quarter? Help with that would be appreciated. And the final question is on the working capital on Slide 8. If you can help us to understand the number of working capital absorption due to the first quarter of the year, if I'm not wrong, $130 million U.S. Dollars, and your expectation, any comment on that and your expectation by the year end?

[Paolo Pallotti, executive]

Let me take just the answer regarding the migration of the clients and then I leave the rest is for Marcelo. Regarding the migration of the customer, there is a trend that is let's say, is switch from the regulated to the free market. Honestly it is quite difficult to anticipate to make some -- some hypothesis regarding the present state of the switch and what we are saying that there is a, let's say, more amount of -- [ more cast ] of small companies that are now as reaching or sometimes they request us, which honestly in some cases we found some requests that are not ranging in the condition for the switch. But this is the [indiscernible] and activity that is going on even if we don't see a strong impact in the short term.

[Marcelo de Jesus, executive]

Just complementing Paolo's comments, this shift from [ free client ] to regulated to [ free clients ] at this part just to give you an idea, the shift, even though there was a migration from regulator to [ free clients ] then that impact was a positive effect of $50 million. So we have a strong portfolio of contracts which are really well-constructed through 2024, with a good quality of contracts. So if you talked about with our portfolio at least through 2021.

[Paolo Pallotti, executive]

Let me add 1 point, that this reaching could be also an opportunity for the company in contacting and acquiring customers outside of the concession area. That they could be an additional upside.

[Marcelo de Jesus, executive]

With coming back to your question on the generation business, on Slide 6, so taking out the one-off impact for AngloAmerica our EBITDA growth of 87%, the most contribution yet was related to Enel Green Power. But I think we need to highlight here that not additional contracts for Enel Green Power, just to give you an idea -- if Enel Green Power new contracts contributed to $27 million to our EBITDA growth while $43 million is coming from, as I said previously, the mix of the assets. So we have in this quarter, Enel Green Power contributed with 255-gigawatt new contract sales, while contributed to 800 gigawatt hour reduction. So this is a key element again of our business, the new book capacity to contribute to our portfolio of contracts which has contributed to improve our EBITDA margin. Regarding last questions on working capital, yes, this quarter is a quarter that our hydrology is very low. So we have higher contribution of cash as well, and we have other payments with respect to electric [ doses ]. We expect our working capital requirement reduce over the year so that we come back to our FFO ratio back to 70%, 80% as we have in the full-year basis.

[Operator]

[Operator Instructions] At this time I have no callers in the queue for the questions. I would like to turn the call back to Susana Rey for closing remarks.

[Susana Rey, executive]

Well, since there are no further questions I would like to thank you for your participation in today's conference call. If you need further assistance, Investor Relations team will be glad to help you. I also [Audio Gap] you to visit our website where you can obtain the most relevant [Audio Gap] concerning our company. Thank you very much and have a nice day.

[Operator]

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Everyone have a wonderful day.