Enel Americas SA
SGO:ENELAM
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Good day, ladies and gentlemen, and welcome to Enel Américas' 1Q 2018 Results Conference Call. My name is Ayella, and I will be your operator for today. [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 Enel Américas and its management with respect to, among other things, Enel America's business plans, Enel Américas cost reduction plans, trends affecting Enel Américas financial condition or results of operations, including market trends in the electricity sector in Chile or elsewhere, the provision and regulation of the electricity sector in Chile or elsewhere, and the future effect of any changes in the law and regulations applicable to Enel Américas or its affiliates. Such forward-looking statements reflect only our current expectations, and are not guarantees of future performances, and involves 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 Enel Américas' 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 these forward-looking statements, which speak only as of dates -- as of their date. Enel Américas 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. Rafael De La Haza, Enel Américas Head of Investor Relations. Please proceed.
Thank you very much. Good afternoon, ladies and gentlemen, and welcome to our conference call on the first quarter 2018 results, which will be hosted by our CFO, Mr. Paolo Palloti. I'm Rafael De La Haza, Head of Investor Relations.
Let me remind you that this conference call will follow the slides that have been already uploaded to the company's website. Following the presentation, we will have the usual Q&A session, opened to analysts connected to this call.
Now let me hand over the call to Paolo, who will start by outlining the main highlights of the period in the slide [ numbers ].
Thank you, Rafa. During the first quarter 2018, Enel Américas EBITDA reached USD 820 million, an increase of 26% compared to the same period in the previous year, mainly driven by the improvement in operating results in Argentina and in Brazil.
Generation business EBITDA improved by 17%. This is mainly explained by higher revenues in Argentina and to the consolidation of Volta Grande in Brazil.
EBITDA in distribution business increased by 56%, mainly explained by better results in Edesur, due to the full application of the new tariff scheme, and by improvement results in Enel Distribution Goiás, previously named Celg.
Total net income of Enel Américas group for the period was USD 333 million, which represents 133% increase compared to the same period of the previous year, and it's mainly explained by better operational results and the lower financial expenses. Net income attributable to Enel Américas shareholders increased by 200%, reaching USD 221 million.
Let's now take a look at the market context in the period, in the Slide #3. During the first quarter of this year, GDP has shown a solid growth better than 2% in all the countries of presence for Enel Américas. In particular, in Brazil, Colombia and Peru, the growth was higher than last year. In Argentina, despite a slight decrease, shown a strong 2.6%. It is important to highlight the strong improvement in Brazil that moved from 1% to 2.7% in this period.
Regarding energy demand in our concession areas, in this period, we saw a recovery in Brazil and Colombia, while Argentina keeps decreasing but milder than the same period as last year.
Peru, reduced -- a reduction mainly explained by economic slowdown and the milder temperature.
Looking at the exchange rates. Currencies in Colombia and Peru slightly appreciate against U.S. dollar. On the other hand, Brazil has shown a slight decrease, while Argentina had a significant devaluation. These currency movements had a negative impact on EBITDA of USD 36 million on a consolidated basis.
Let me now comment the main operating data in the following slide. Our total net production decreased by 0.7 terawatt hours compared to the first quarter of 2017, mainly as a result of the lower hydrology condition in Colombia, and the lower water availability in Peru due to the floods and subsequent interruptions of the hydro power plant at Callahuanca since March 2017.
Energy sales of our generation company increased by 13%, mainly explained by higher sales in Cachoeira Dourada, due to heightened demand in the market and the acquisition of Volta Grande in Brazil.
Distributed electricity amounted to 19.2 terawatt hour, 6.9% higher than last year, mainly explained by the consolidation Enel Distribution Goiás. In 2017, its contribution was for only 2 months. In homogenous terms, distributed electricity remains substantially stable.
Compared to first quarter in 2017, our customer base increased by 250,000 clients as a consequence of the organic growth in all the countries. The company is currently serving 17.2 million clients.
Now we're going to take a look at the main financial figures of Enel Américas in Slide #5. Revenue increased by 20% compared to the previous year, reaching about USD 2.8 billion. This positive increase was due to higher revenues in the 4 countries of presence.
In Brazil, the company obtained higher revenues for about USD 215 million, thanks to higher energy sales, as I mentioned before, in Cachoeira Dourada the consolidation of Volta Grande and the contribution of Enel Distribution Goiás.
In Argentina, higher revenues were about USD 140 million were mainly due to the application and the full recognition of the new SDI in Edesur, and the new remuneration in the generation business applicable since February 2017.
In Colombia, revenues increased by about USD 70 million due to the company's successful business strategy aimed at increasing energy sales under long-term contracts in the generation business, and higher demand in the distribution business.
EBITDA increased by 26% or USD 169 million compared to first quarter 2017. This is mainly due to the following: in generation business, mainly explained by the contribution of Volta Grande in Brazil; and the remuneration in existing generation asset in Argentina in place since February 2017; and better prices in Colombia.
In the distribution business, due to the new regulatory environment in Argentina, and the positive contribution in Enel Distribution Goiás. That, in the first quarter of 2017, reported a negative EBITDA impacted by the voluntary retirement plan provision.
Total currency conversion entailed a negative effect of minus USD 36 billion, mainly [ explained ] by Argentina.
Total net income after tax reached USD 333 million, 133% more than the first quarter 2017, mainly due to better operational results and the lower financial cost, as previously mentioned. Net income attributable to our shareholder increased by 200%, from USD 74 million to USD 221 million.
Net debt reached USD 3.94 billion, which represents an increase of about USD 0.6 billion versus December 2017, mainly explained by investment in the period, payment of dividends, the remaining [ quarter 2015 ] in Colombia and dividends paid by Enel Américas in January 2018.
Let me continue with the EBITDA evolution by business, in Slide #6. On the left-hand side of the slide, you can see the generation activities increased EBITDA by 17% or USD 60 million in nominal terms. Excluding FX conversion effects, EBITDA would have increased by USD 73 million.
In distribution, in nominal terms, EBITDA increased by 36%, mainly due to the consolidation of Enel Distribution Goiás and the new tariff scheme in Argentina, partially compensated by a negative effect of USD 25 million. It's important to highlight that in distribution business, we currently have a very stable regulatory situation, as Colombia and Brazil have defined its new tariff process and Argentina has already adopted in full the new tariff regime defined in February last year.
Now let's have a look at our total CapEx allocation, in Slide #7. Total gross CapEx for the period amounted to USD 251 million, which represents a decrease of minus 8.3% or minus USD 23 million. Lower CapEx was mainly due to the increase in Peru and in Colombia. In the first quarter 2018, gross CapEx represents 36% of the total CapEx in the period versus 55% in the same period of the previous year, mainly due to some delay in the CapEx growth plan in Brazil that will be recovered in the following month.
Distribution CapEx is around 90% of our total investment, and this is aligned with the target announced in the strategic plan 2018 to 2020, amounting to USD 226 million during the period. From geographical point of view, 55% of the investment are devoted to our subsidiaries in Brazil.
Now let's analyze the key financial economic drivers on a country-by-country basis, beginning with Argentina in Slide #8. EBITDA in Argentina increased by 105% or USD 74 million, reaching USD 145 million. The pressure on EBITDA increased by USD 112 million, but with a negative currency impact of minus USD 38 million.
In generation, EBITDA increased by 150% or USD 29 million, reaching USD 54 million. This is mainly explained by higher tariff for existing capacity in older technology, partially offset by lower physical sale basically due to the lower availability of Costanera and a negative currency effect of about USD 14 million.
In distribution, EBITDA increased by 100% or USD 45 million, mainly explained by the new tariff scheme defined in February 2017. Let me remind you that the new tariff was implemented in 3 steps. And finally, only since February 2018 we are billing the full tariff. In this sense with again on February, the recovery of USD 210 million in 48 monthly installments due to delay in the application of the full tariff we experienced during 2017.
CapEx was in line compared to last year, reaching USD 39 million for this period. The process on the settlement of the regulatory liability associated with the lack of a proper tariff adjustment in the 2002-2016 period is ongoing, and we expect to have a final solution between the end of June and beginning of July.
Let's move to Brazil on the following slide. In Brazil, overall EBITDA in the period increased by 53% or USD 88 million. EBITDA in Generation business increased by 16% or USD 15 million, thanks to the consolidation of Volta Grande, which contributed with USD 23 million in the period. This was partially offset by lower EBITDA in Fortaleza, due to the gas legal compliance with Petrobras.
Our EBITDA in distribution increased by 92% or USD 80 million, mainly due to the consolidation of Enel Distribution Goiás contributing with USD 40 million during the period versus the minus USD 43 million registered in the same period over the previous year. Enel Dx Rio also improved its result due to the lower equipment and service cost, resulting from the operational efficiency implemented by the company, while Ceará showed a reduction mainly due to higher cost of service due to increasing maintenance and [indiscernible] initiatives to improve tariff collection.
CapEx in Brazil slightly increased compared to last year, reaching USD 139 million more concentrated in Enel Distribution Goiás, compensated by lower CapEx in Enel Distribution Rio.
Let's move to Colombia on Slide #10. EBITDA in Colombia increased by USD 3 million or 1% in this period compared to 2017, mainly due to the positive currency impact of USD 6 million.
In generation, Emgesa had 84 -- 80.4% increase in EBITDA, mainly due to higher physical sales and also due to a positive currency impact.
In distribution, EBITDA in Codensa was 8.4% lower than 2017, mainly explained by higher energy purchase cost and increase in fixed cost. Energy purchase cost are a pass-through, and will be recovered in the second quarter, while fixed cost increase is mainly explained by growth in personnel cost associated to new projects included in the CapEx plan of the company for 2018, and the consolidation of the [ build business light ].
CapEx in Colombia decreased by 18% due to [indiscernible] in the CapEx plan both in generation and distribution as the company expect to recover in the second quarter 2018.
Let's analyze Peru on Slide #11. EBITDA in Peru increased by 1.9% or USD 3 million, reaching USD 133 million. This increase is completely attributable to the positive currency effect, as both generation and distribution business were flat compared to the last year operation tariffs.
In Generation, EBITDA increased by 3.3%. The company registered a higher reporting revenues resulting from the insurance compensation in for dividend in [ Ventanilla ] in 2017. That was mostly offset by the higher sales cost caused by the increase of the energy price in the spot market and the gas purchase due to the increased [ CGP ] production to compensate a lower Hydro production.
In distribution, EBITDA reached USD 56 million, the same level that last year. Sales slightly decreased compared to last year, while the number of clients increased by more than 24,000.
Total CapEx decreased by USD 15 million. In view of the specific investment made by -- in the same period of 2017, for the new TG6 thermal power plant in Malacas.
Let's now have a look at the financial performance in the following slide.
Starting from USD 820 million EBITDA, the company registered a G&A for an amount of USD 189 million or plus USD 15 million more than previous year due to the consolidation of Enel Distribution Goiás, reaching an EBIT of USD 631 million.
Net financial results amounted to minus USD 127 million, which represent a lower cost of USD 70 million compared to last year. This is mainly explained by lower financial cost in Argentina due to a positive currency effect in El Chocón and Dock Sud due to [ the cost of ] credit in U.S. dollars. A negative one-off registered in the first quarter 2017 for fines in Edesur, and a lower financial cost in Enel Distribution Rio. This was partially compensated by the positive effect registered in 2017 related to the acquisition of Enel Distribution Goiás.
Income tax registered in the period was USD 170 million, an increase of USD 33 million compared to last year, mainly due to higher level of earnings before taxes that increased the base taxable income. The effective tax rate during the period was 34%, an improvement compared to the tax rate in the same period of 2017, that was 49%, mainly due to the decrease in the nominal tax rate in Argentina, and losses registered in Edesur in 2017 that were not deductible for tax purposes.
Net income amounted to USD 333 million, where -- while attributable net income reached USD 221 million, a 200% increase compared to the previous year.
With all these elements, let's analyze the cash flow slides in number -- Slide #13. Funds from operations amounted to minus USD 12 million. This result includes the net working capital [ in the period ] of USD 541 million increase in net working capital -- that was the previous year is mainly explained by investment [ accrued ] in the fourth quarter of 2017 that were paid in 2018, and an higher level of outstanding commercial credit due to the new tariff in Argentina. These extraordinary effects in net working capital will be recovered during the year.
Taxes paid during the period amounted to USD 153 million. Net financial expenses paid during the period amounted to USD 157 million, mainly related to our activity in Brazil and Colombia.
Free cash flow amounted to minus USD 263 million during the period after investing $251 million in maintenance and gross CapEx as indicated in the previous slides.
Dividends paid by the company during the period amounted to USD 98 million. Financial receivables amounted to minus USD 94 million. And the FX effect amounted to USD 135 million. With all these effects, the total net debt increased by USD 590 million compared with December 2017.
Now let me focus on the debt in Slide #14. Gross debt amounts to more than USD 5.3 billion with an increase of USD 359 million versus December 2017. This growth is substantially explained by an increase in financial debt in Enel Distribution Rio and Enel Distribution Goiás, and the FX effect for about USD 140 million.
As mentioned on the previous slide, net debt increased by USD 0.6 billion. The increase is mainly located in Brazil, where we also carry out some short-term bridge loan operation, while the company structure is long-term loan operations. And in Colombia, mainly due to a negative currency effect cash optimization and debt settlement.
That breakdown of debt by currency reflects the debt policy of the company acquiring most of the debt in the operating companies, where it is denominated in the same currencies in which cash is generated. The debt in U.S. dollars belongs to Holding, which changed these functional currency to U.S. dollars in 2017. And to Peru, where a part of the cash flow is dollar-denominated.
We ought to mention a decrease of 80 basis points in the cost of debt since December 2017, as a consequence of better market condition and acute financial discipline.
Let me now continue with an overview on the current situation of [indiscernible] for Eletropaulo, and the fitting of these assets into our strategy. As you probably know, on April 17, Enel Américas made a public tender of 4 Eletropaulos shares for up 100% of the shares. Also, we made the commitment to subscribe a capital increase for up BRL 1.5 billion in case the tender of acceptance was higher than 50% of the share. Currently, the tender offer [ posit ] is open ] and the other participants have made their own offer. Our current offer is at BRL 32.2 per share. This operation perfectly fits with the growth strategy announced by the company [ on its for digital ] plan.
Eletropaulo is the largest distribution company in Latin America with more than 7 million clients, 43 terawatts hours of energy sold, and located in the privileged concession area, as is the state of São Paulo. The condition would allow us to take advantage of [ our nao ] in the distribution sector, and obtain a valuable stability for this company.
Taking as an example the purchase of Enel Distribution Goiás this year, we have proven that we have the expertise to improve the operation of the distribution company, and how to make it more efficient no matter where the company is located. In case this operation is successful for us, we will be the largest player in the Brazilian market. Until the process is closed, we cannot deliver more information than the public one. Due to this, we will not answer questions regarding this process in our Q&A sessions.
Now we are going to finish with the closing remarks of the period in the following slide. Let me conclude this presentation by highlighting the solid improvement in our results compared to last year, confirming that we are well on track with a target amount in our strategic plan 2018-2020. The go-to scenario in the region keeps showing stability, and encourages to continue investing. Argentina has concluded the tariff increase announced in February 2017. Brazil has defined the WACC for the Enel Rio and Enel Goiás distribution company. While in Colombia, the regulator has settled the condition for the new regulatory framework that probably will be applied during the second part of the year.
Finally, Enel Américas has launched a tender offer for Eletropaulos's shares, as we really believe that our proved expertise in the distribution business and our good knowledge in the Brazilian market will allow us to create value for the company and for our shareholders in case of success in the process.
Well, thank you for your attention. I'll now pass the call to the operator for the Q&A session.
[Operator Instructions] Our first question is from Enrico Bartoli with MainFirst.
First of all, on Enel Distribution Goiás. You highlighted the very strong increase in EBITDA that you reached compared to last year. Could you please elaborate a bit more on the drivers on that strong increase? And could you remind us what level of EBITDA can we expect for the full year 2018?
Then I have a question, if you can remind us that the [ revalues ] for the distribution businesses in the countries where you operate. And finally, on Argentina on Edesur, if you can remind us the amount of increase on EBITDA that you expect for the full year? And if you see any risk that some of the terms of the tariff increases that have been agreed could be changed consider that, I guess, that there are some discussions about this in the Argentinian Parliament?
Yes, let's start from first with Enel Distribution Goiás. The -- let's say that the effect is double. We see a margin contribution and efficiency contribution. The first [ step our ] turnaround, we acted at the first efficiency level. In 2017, we launched the voluntary retirement plan, that's had a very strong success. And the anticipated -- the efficiency effect -- the efficiency results on the CapEx. So this means, that we have been able to finalize a 2017 result that is in the range of $150 million of EBITDA that is a result of 2017. And the increase is ongoing also because there will be a new regulatory framework review in place. And that will recognize also all the investment that has been made in 2017 and the first half -- and first month of 2018 within the new [ rap ]. And this will mean a margin increase in the company. So through the combined effect of increase in efficiency, and in preventing the CapEx that will be recognized in the new tariff framework that should be in place starting from second half of 2018. And with the WACC that was confirmed last March by the regulator give us, let's say: first, a signal that the efficiency plan has been recognized and is in place. And second, to reach the target at the end of 2018 that is [ an alfor ] $200 million. Regarding -- maybe that in [indiscernible] -- I didn't get in full the question regarding the value of the distribution business in the area where we are -- if I can comment on this -- if I can comment on regional basis what we have already realized is that in our business plan 2018-2020 that with the first stability in the regulatory framework, in all the regions in the countries where we are, then this [ stability ] has been confirmed recently both -- by both the regulator of Brazil and the regulator of Colombia. We've seen increase in the regulatory asset base of the whole companies with an increase that is in the range of $4 billion, that is quite a significant size. And the stability also is at the level of WACC -- the regulatory WACC. This stability has been confirmed also in -- recently in Colombia. And so we have planned within our business plan, an increase in the range of $1.5 billion EBITDA increase in 3 years. And the result that we are having in the first quarter is confirming this trend. Regarding Edesur, the first quarter show an increase, a strong increase compared to the first quarter 2017. The process is ongoing. We expect it to, let's say, starting from the result of 2017 that is in the range of USD 160 million. We expect to get the full growth allowed by the new regulator -- or the new tariff [ keys ] that -- let's say, the application has been slightly delayed in 2017, and the effect was delayed in getting the full appreciation of the tariff. In 2018, now we are, let's say, fully adopted the new tariff scheme. The result is reflected also in the results of the first quarter. And I would not discuss about negotiation with the government, because, let's say, that they -- the discussion has been already settled. And so we see the process ongoing for the definition of the, let's say -- the definition of what we call [ activo ropa ], which is the recognition of the settlement of [ the activo ] in the previous year 2016. And regarding the stability of the tariff scheme -- the new tariff scheme, it has been just settled. And we expect that it will continue to keep on track as defined by the law.
Our next question is from Charles Fishman with Morningstar Research.
Last quarter you announced a -- revised your dividend policy, the payout policy. Based on the strength of the first quarter results, do you think there's a good chance to going back to the higher payout ratio next year if the strong results continue?
The result of first quarter is in line of the expectation of 2018 target. We expect to reach -- end 2018 a net income of USD 1.4 billion. This is why we decided to propose to the board a reduction in the payout ratio, is because we see that in the USD 1.4 billion, there are a contribution of capital of non-cash items one-off, let's -- we expect that it will take place and should take place in the next month. So the scheme and the approach, the payout, the dividend distribution is confirmed. It's confirmed also by business -- by business [ out ]. As I mentioned during the previous conference call, we expect to, let's say, set the new payout in line with the previous one confirming also the dividend increase of -- capacity of the company.
Our next question is from Meike Becker with Bernstein.
I'm interested in your renewable strategy in Argentina. I think Enel announced that you're now planning to enter Argentina. It would be interesting to hear why now? And what are you planning in terms of capacity?
If I well understood, regarding our role in the generation sector of Argentina. What we said and what we see that with the new, let's say, the regulatory framework that is regulating the availability of the plants or the system, we see an increase in our result. So this is the reason why we see a, let's say, quite strong position -- our position -- strength of our position in generation. If you're referring to the different kind of technology, this is a trend that may take place in Argentina, for time being it's just the beginning. And they are competing in a market that is different from the one that our generation of Enel Américas is competing. So it is, let's say, not within the [ frame of our interest ] for time being.
Our next question is from Marcelo Britto with Citi.
According to the strategic plan you presented, you seen Edesur's net [ rob ] growing from $2.4 billion to $3.8 billion by 2020. But when you look at the level of CapEx deployed in 2017, roughly $200 million. And also the level of CapEx in this quarter, $31 million. How do you think -- or do you think that the rate-based target for 2020 for Edesur is doable/feasible, given the current level of CapEx you have been deploying?
In our plan, we have a CapEx plan that is in the range of north of $300 million each year. And this is, let's say, due and is devoted to the improvement of the quality of the grid. And to, let's say, avoid or limit at max the level of fines that Edesur received in previous years. And this is, let's say, the main -- the one of the main target of the CapEx development, and this is part of the value creation within Edesur. So if we look at the level of CapEx that we are planning now for 2018 and what is in the plan, it is, let's say, in line with the 1 billion [ rop ] increase that you mentioned. Considering also that the inflation effect of their other debt is included in the evolution.
And I'm showing no further questions. I would now like to turn the call back to Paolo Palloti for any further remarks.
Okay. As there are no more questions for the moment, I conclude this conference call. Remember that our IR team will be glad and available to assist you with any further questions you may have. Thank you very much, and have a nice evening. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect. Everyone, have a great day.