Enel Chile SA (ENIC) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Enel Chile's 2017 Results Conference Call. My name is Brian, and I will be your operator for today. (Operator Instructions) As a reminder, this conference call is being recorded.

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 Chile and its management, with respect to, among other things, Enel Chile's business plans; Enel Chile's cost-reduction plans; trends affecting Enel Chile's financial conditions or results of operations, including the 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 Enel Chile's or its affiliates.

Such forward-looking statements reflect only our current expectations, are not guarantees of future performance and involve risk 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 equity capital markets of the United States or Chile, and increase in the market rates of interest in the U.S. or elsewhere, adverse decisions by government regulators in Chile or elsewhere, and other factors described in Enel Chile's annual report and Form 20-F, including under Risk Factors.

You may access 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 as of their dates. Enel 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. Raffaele Grandi, Enel Chile's CFO. Please proceed.

Good morning, everyone, and welcome to Enel Chile's conference call to review our results as of December 2017. My name is Raffaele Grandi, CFO of the company. Joining me today is Mr. Nicola Cotugno, CEO; and 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.

To start, I will pass the call to Nicola to highlight the most important changes in our operations and market context during 2017. Please, Nicola.

Good morning, everyone. I would like to start reminding you that Enel Chile started its operations on March 1, 2016. And as a consequence, we have prepared pro forma financial statement, including 12 months of operation for 2016, so we can compare with 12 months 2017 for a better understanding on this call.

Moving to Slide #2. Enel Chile's EBITDA decreased $40 million, amounting to $1,139 million, mainly explained by $23 million of lower EBITDA in the distribution business and $21 million in the generation business.

Net income attributable to shareholders decreased 9% or $54 million, especially due to a lower positive extraordinary gain from the sales of assets and higher tax expenses. The simplification was and is an important pillar in Enel. During the last years, we have reduced the number of companies passing from more than 20 to 9. And with regard to Elqui, the reorganization process is ongoing and the tender offer started on February 16.

The main issues in our generation business were EBITDA that decreased 2%, driven by higher green tax payment, higher hydro generation by 575 gigawatt hours. Additionally, during the last years, we were able to clean our pipeline of projects writing off different hydro assets. Then we at (inaudible) we sold Electrogás that was not defined as a strategic asset.

Regarding our distribution business, we registered a growth of 3% in our customers that amounted to 1.9 million clients. The current margin, net from extraordinary assets, increased 5%, amounting to $441 million, mainly due to the regulated business. Also, value-added services gross margin increased $4 million, amounting to $33 million related with the public lighting and infrastructure [projects]. EBITDA decreased 8%, amounting to $273 million. Net from extraordinary assets, would have increased 5%.

Let's move to Slide #3. Before we start reviewing our financial results, I would like to focus on the market context in which we operated. The Chilean economy remained flat. The GDP growth for 2017 is expected to be 1.5 -- to increase 1.5%, mostly explained by a lower performance of the mining sector contribution together with the reduction of private consumption and greater public expenditures. For 2018, the scenario is expected to be more positive with a growth of 3.1%.

Energy sales in the system increased 1.2%, totaling 68 terrawatt hours. It is important to mention that in our concession area, sales increased 3%.

Regarding hydrology, despite the fact that 2017 continues to be classified as a dry year, the level of reservoir in the system increased from 23% to 32% of the maximum stored energy. With respect to the reservoir relevant to Enel Generación, the energy available for Generación rose from 20% to 27%. Energy subscribed in the system remained stable, reaching $73.8 per megawatt hour as a consequence of higher water availability, but at the same time, higher commodity prices.

With respect to the average exchange rate, we faced an appreciation of 4.1% of our currency versus the dollar, which negatively impacted our generation sale denominated in dollars.

Let's now move to Slide #4 to explain the most relevant key performance indexes in our generation business. Installed capacity presented no variation, amounting to 6,400 megawatts installed.

Net production decreased 3% amounting to 17.1 terawatt hour, primarily due to 1,007 gigawatt hour of lower combined cycle generation due to lower production by GasAtacama of 842 gigawatt hour and San Isidro II for [490] gigawatt hour, offset by our production in San Isidro I for 244 gigawatt hour. We had 326 lower coal generation in Bocamina for 427 gigawatt hour precisely, and this was due to a reschedule of maintenance in October and November. We had 575 gigawatt hour of hydro -- high hydro generation, primarily in Ralco and Pangue, and we decreased -- we increased for 246 gigawatt hour, the oil and gas generation due to higher generation like Quintero for 153 gigawatt hour, and Taltal for 95 gigawatt hour.

Please note that we have seen a recovery of hydrology in the last quarter of 2017. And as we said, we improved the level of our reservoir from 20% to 27%, which also favors our position for the beginning of the current year.

Physical energy sale decreased by 1% or 333 gigawatt hour as of December '17, primarily to 223 gigawatt hour of lower contracted sale due to less consumption of distribution companies, offset, for a big part, by higher sale to 3 customers. And at the same time, we had under 10 gigawatt hour lower sales in the spot market due to lower energy dispatch.

Let me highlight that, excluding the spot market, we were able to sell almost the same amount of energy by changing our mix of customers.

Moving to Slide #5, we touch upon key indicators for the distribution business. Physical energy sale increased 514 gigawatt hour, that is 3%, as we said before, primarily due to higher sales to residential customers of 234 gigawatt hour and commercial customers of 196 gigawatt hour.

Higher tolls for 265 gigawatt hours, offset by lower sales to industrial customer of 85 gigawatt hour and to municipalities and public parties of 97 gigawatt hour.

Customer -- the number of customer rose 3% or 57,000 during this period, mainly in residential segment, reaching 1.9 million clients. With regards to our interruption index, the ratio increased by 11% as a consequence of the exceptional rains and snow occurred in June and July '17. If we exclude these effects, SAIDI, so our indicator of interruption, would have decreased 5%.

Energy losses remained stable at 5.1%, very close to the level of technical losses.

Now, I will pass again to Raffaele to review our financial information.

Thank you, Nicola. Now on Slide 6, let me highlight the most important financial consolidated changes as follows: revenues decreased 1%, primarily due to lower energy sales in our generation business; EBITDA decreased 3%, amounting to $1,139 million, affected by the performance in both businesses; depreciation, amortization and impairment expenses decreased by $57 million to an expense of $247 million, thanks to specific revision of the useful life of [fixed] assets, partially offset by higher investment that translated into an increased asset base and to the lower impairment of projects compared with previous years; net financial result increased to an expense of $35 million, mainly due to a lower net exchange rate effect as a consequence of the Enel America's debt payment in 2016; other nonoperating results decreased $29 million since the sale of Electrogás on February 2017 generated a lower value than the sale of GNL Quintero occurred on September 2016.

Taxes increased $49 million, primarily as a consequence of higher corporate tax rate, lower benefits from CPI indexation and exchange rate on foreign investments held in 2016.

Given all the aforementioned, net income attributable to Enel Chile's shareholders increase 9% or $54 million, amounting to $538 million.

Now, please, let's go to Slide 7, where you can see each businesses contribution to our EBITDA. In generation, EBITDA decreased 2% or $21 million, explained by lower sales for $63 million as a consequence of lower volume; different mix between regulated and nonregulated clients, partially mitigated by higher gas sales; higher cost of $14 million due to different effects, which are composed of higher green tax expenses of $27 million; higher gas commercialization cost and lower transportation cost. Finally, lower fuel consumption cost for $22 million due to a better hydrology.

In distribution, EBITDA decreased 8% or $23 million, mainly explained by higher revenues for $27 million due to higher energy sales to residential, commercial customers and tolls, and the better performance of our nonregulated businesses for $4 million related with infrastructure projects and public lighting. All this was offset by higher cost for $25 million, primarily due to fines related with the rain and snow events in June and July 2017, and higher fixed expenses for $90 million, mainly as a result of the emergency care and the trade training project.

Let me remind you that we had the worst snowstorm in the last 47 years, and without these extraordinary effects, EBITDA would have increased 5%.

Please join me now in Slide 8 to show recurrent gross margin breakdown for our distribution business, isolating the fines provisions and voluntary compensations made due to the snow and rain events in June and July that I just mentioned. Total recurrent margin increased 5% in respect to 2016, due to $18 million of better margin in the regulated business as a consequence of higher sales and a better mix.

Regarding nonregulated businesses, added-value services registered an increase in margin of 14% or $4 million as a consequence of better results in public lighting and infrastructure projects due to bids won in different areas in the country, reaching around 234,000 lighting points. Physical sales to the free market increased by 24% as a consequence of new contracts with free customers and potential free customers inside and outside our concession area.

Now on Slide 9. We can see funds from operations that amounted to $1 billion, after tax payment, working capital needs and financial expenses. It's important to notice that our positive funds from operation fully cover our maintenance and growth CapEx of $458 million.

Regarding net dividends, we paid $402 million, of which $244 million were paid to Enel Chile's shareholders.

As you can see, Enel Chile also reduced its debt by more than $300 million, and with its better management of the treasury, benefits from a stronger and healthy financial position, especially in consideration of the new future organizational structure.

Please join me now in Slide 10 to focus on our investments. Gross CapEx reached an amount of $458 million. From this total amount, $350 million were used in the generation business and $144 million in distribution.

Maintenance CapEx reached an amount of [$156 million], $100 million in generation, primarily in our thermal facilities due to improvements in the performance of Bocamina and long-term service agreement in our combined cycle plants and gas oil plants. The reduction compared to last year is primarily explained by optimization completed in Celta and Bocamina. $54 million were invested in Enel Distribución, mainly load increase, corrective maintenance and improvement of our facilities.

Regarding 2016, the figures are similar, but with a switch from load increase to quality improvement. With regard to gross CapEx, it reached an amount of over $300 million, a total of $212 million in generation, $159 million are explained by Los Cóndores.

Let me comment to you that we had, had some technical difficulties related to the geology of the area. We have been implementing different solutions to solve this. As a consequence, we are expecting a delay in the commercial operations for 2020, and approximately 20% increase in CapEx.

$90 million in Enel Distribución, this refers mainly to customer connections, quality of service, smart meter and electric grid [relocation].

Now we can go on Slide 11, and we'll have a look at our financial situation. Total gross debt remained stable, amounting to $1,272 million. Of the total gross debt, almost all of the amount correspond to bond issuances, both international and local, of power generation business. Note that we do not have an important upcoming maturity with third-parties in the next 3 years. [Please], it is important to highlight that thanks to positive cash generation, we've been able to reduce our net debt at less than $600 million.

Now I will pass the call to Nicola to update on Elqui transaction. Please, Nicola.

Thank you, Raffaele. And let's move to Slide 12 and have a look to the indicative transaction timetable for Elqui. On December 20, 2017, the Extraordinary General Meeting of Enel Chile and Enel Generación Chile approved a transaction proposal with a large majority. On January 19 of current year, the withdrawal right period finished with 2.09% of the total shares. As of today, the withdrawal right has slightly decreased.

The percentage exercise was very low and confirmed the good perception that the market has regarding the operation of Elqui.

On February 16, we started the tender offer of Enel Generación. This process will finish on March 22. And we need to reach a minimum of 75% of the ownership of Enel Generación complying with the last condition of the transaction. As defined last year, simplification, as I already said, is one of our pillars, so it is important to highlight that the Elqui restructuring process is ongoing well, and we expect the reorganization effectiveness on April 2 of current year, once all the condition of the transaction will be verified.

Let's move to the last slide, Slide 13, where I would like to make a summary of the most important issues occurred during this year.

2017 results are in line with our guidance released on November '16.

The reorganization process, Elqui is going on as scheduled. The effectiveness of the overall organization is expected on April 2, once all the condition of the transaction will be verified.

Despite adverse climate condition characterized by poor rain and extraordinary events, the last quarter has beneficiated from a recovery of the hydro condition to such an extent that hydro production at the end of the year was 0.6 terawatt hour higher than the previous year. This will allow to rely less on thermal production and optimize variable costs, so confirming opportunities deriving from a diversified mix.

Important increase in the free market in generation and distribution should be mentioned.

And we expect, as a final point, to have an higher dividend payment, despite lower net income.

Finally, 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, despite the challenging scenario that we are facing.

This concludes our review of Enel Chile financial results as of December 2017. And now we will be glad to answer any questions you may have. Operator, please?

(Operator Instructions) And our first question comes from the line of David Galante from Scotiabank.

I have a couple of questions. The first one, you commented about the 20% over costs in Los Cóndores. Could you tell us if you expect to spend most of that 20% during this year and the next, given that you expect Los Cóndores to start in 2020? My second question regards the tariff review in Chilectra. Could you give us a bit of a color regarding the status of the revision?

Yes. So let's start from the first point. If I understood well, you were asking about the 20% increase in CapEx, how this will be distributed, so...

At Los Cóndores.

Yes, of Los Cóndores project. As Raffaele was mentioning, we were -- yes, we were facing some geological difficulties, we have reorganized the work and we're progressing negotiation with the main contractors. So let's say, the extra CapEx that is coming out is partially due to the delay and partially due to higher costs, and will be, let me say, more or less equally distributed in the next few years; so the next 3 years of activity, '18, '19 and '20. So more or less, you will see this impacting some [$80million] per year. If we go to the second point, you were asking about the impact of the revision of the tariffs. Well, if I have to say, in term of revenues for Enel Distribución Chile, nothing was changing. There was an exchange in the different kind of tariffs that were decreasing 4% for the residential customer and increasing for other segments. But as a complete basket of customers for us, there was no impact.

Okay. Yes. That was very clear. Just another question. I was looking at the presentation you guys released in January regarding Enel Chile. The guidance you give for the contracts of Enel Generación Chile for the following years, does it include a potential migration from customers and also the over-contraction of the distribution companies, or this is just the contracts as it is?

See, yes, we confirm that we were considering also the migration process that actually we can confirm is ongoing, pretty much in line with our expectations. So move of customer -- the move of customer to the free market is more or less in line. And the good news that we highlighted before was that we are taking a big share of this customer for more or less 60%. So 60% of the customers have migrated. We were capturing with new contracts in the free market, both in generation business and in distribution business. So actually, we are progressing pretty much in line with the guidance, and with the target to capture and recover, let's say, the loss of customer on the regulated segment in the free market segment.

Let's see if I can complement, since we are talking about these free customers, in this year, we gained 1 terawatt hour of new free customers, most which are not reflected yet in our numbers in 2017 because, as you know, usually, there is a time of almost 12 months since the moment in which one client decides to migrate and the moment in which he will migrate. So that means that for next year, we already have a good part of this 1 terawatt for -- guaranteed.

Okay. So just to make sure I understand correctly, you think it will come to migration, but not a potential reduction in the demand from the distribution companies, right? So there's a bit of, let's say, downside risk on those numbers in that sense?

Of course, we are [all] aware that the customer in free market has a price that is lower in the regulated market, so the migration in terms of the impact on the average selling price is impacting. But as we said, our target is to take this migration as an opportunity to grow and mitigate as much as possible this price asset, gaining volumes in the free market. As we were telling, we captured 60% of the customer migrated. That, of course, you understand is more than the percentage of regulated sales that we are losing. We cannot say exactly that this will rebalance the losses on margin, but pretty much is going in that direction.

And our next question comes from the line Enrico Bartoli from MainFirst.

First of all, I have a question regarding the power generation outlook for '18. You mentioned that the other situation is getting better. If you can provide some details about this? And in relation to this, on the presentation, you posted on the website in January, I see that for year '18, you're expecting an EBITDA from generation more or less in line with '17. So if hydro generation is improving, if you can elaborate a bit more on what assumptions are below this guidance? And a second question regarding distribution. In the same presentation, you indicate EBITDA for this year to normalize at the '16 level, if I'm right? It's right to interpret that you don't expect the one-offs you had in '17 to repeat? And then, I see that you are expecting a significant increase in EBITDA from distribution to [$365 million] by 2020. Could you elaborate a bit on what are the drivers below these growth expectations?

Welcome. Listen, we heard you -- the line was pretty much disturbed, so we will try to go one by one to the question if we understood well because the audio was not good. I understood your first question was about hydro production. Is it correct?

Yes.

Yes. So let's comment this. Last year was a confirming general dry year in terms of, let's say, yearly figures. The good thing that occurred was that the last quarter was pretty much generous in terms of water, and this allowed us to really recover a lot. And these are the 600 giga of higher hydro production that we posted at the end of the year. So this is not only -- it's not the only result because on top of producing more, we had increased the level of our reservoirs. Now as you say, as you know for sure, in Chile, the rainy season will start in May, so these are still normally dry years with little precipitation, little rain around the country, so we don't have now element that could, on a firm day, say if this will be a dry year or not. All the studies, the reports of the different scientists that study El Niño and La Niña are not telling anything that could be giving us some kind of clear expectations. So what we can really, based upon our expectation, is judge the level of reservoirs. And if I can anticipate this, the first 50 days of 2018 are moving in line with our budget. So with a medium hydrological year. So far, not bad, but early to say because the change will be visible when the rain should start, that is May -- the month of May. I hope I was sufficiently clear. And we move to the second question. Yes, Raffaele, maybe -- -yes, about the elaboration.

Yes, of course, we had one-off for almost $40 million this year due to the snowstorm. So obviously, we are not expecting this event are going to repeat. So there will be a normalization of our [EBIT]. I want to remind you that our EBITDA, net of this one-off this year, has been -- has registered an increase of approximately $18 million. Obviously, we are also -- keep increasing in our energy sales with a constant increase of approximately 2% or 3%, both due to new clients and also to an increase in the demand.

I would like to elaborate a bit more on the extra cost we had this year as this one-off, let's say, due to the snowstorm. These were not just to, let me say, repair problems where extra costs for an extraordinary plan to take care of our lines and of the interferences there with trees and making some more radical planning of the trees, and we are worked on almost 2,000 kilometers of lines. This puts some solid bases to face potential extraordinary events this year with stronger, resilient capabilities. Moreover, I would confirm that we had already, before the snowstorm, a very important plan of modernization and reinforcement of our grid that we started already in '17 before the snowstorm, and we go on with that also in '18. So modernization, digitalization and increase of [frame] to our lines are the core of our CapEx and distribution.

Sorry, a very quick clarification. On the guidance for power generation EBITDA for '18, you assume more or less the same hydro condition as in '17, I am right on this.

No, in 2018, we are considering a recovery of the hydrology. So we are considering approximately 1 more terawatt hour hydro compared to this year. A bit more. And as I anticipated, January, February, we're going in line with that expectation. So far, so good.

(Operator Instructions) And I'm showing no further questions. I would now like to turn the call back to Nicola Cotugno for any further remarks.

Okay. Thank you. And since there are no further questions, I would like to thank you -- all of you for the participation in today's conference call. If you need further assistance, our Investor Relations team will gladly help you. And 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.

Ladies and gentlemen, this concludes today's program. Thank you for attending. Everyone, have a great day.