Enel Chile SA (ENIC) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Enel Chile's Nine Months 2017 Results Conference Call. My name is [Bridgette] and I'll 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 Reforms 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 condition, 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 Enel Chile or its affiliates.

Such forward-looking statements reflect our only 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 of interest in the United States or elsewhere, adverse decisions by government regulators in Chile or elsewhere and other factors described in Enel Chile's annual report 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 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.

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 September 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 the first 9 months 2017, please Nicola.

Good morning, everybody, I will start with a summary of the result of the first 9 months. I would start also reminding you that Enel Chile started its operation on March 1, 2016. And as a consequence, we have prepared a pro forma financial statement including 9 months of operation for 2016 so we can compare with 9 months 2017 for a better understanding of this call.

First of all, Enel Chile EBITDA decreased $101 million amounting to $770 million mainly explained by $103 million of lower EBITDA in the generation business.

Net income attributable to shareholders decreased 21% or $102 million driven by the sale of non-strategic assets, and of course impacted by the worst performance in generation business. With regard to the reorganization process, Elqui, independent experts and appraisers released their final reports on November 3, 2017.

The main issue in our generation business were EBITDA in the generation business that was impacted by drier conditions, operating margin that decreased 18% amounting to $707 million as a consequence of 8% lower revenues and lower physical sales and lower average price.

On November 3, 2017, [Enel Generación] was awarded contract for 1.2 TWh with regulated clients in a public tender.

Regarding our distribution business, we registered a growth of 55,000 customers that amounted to 1.9 million clients. Operating margin remains stable amounting to $316 million as a consequence of organic stable growth.

Value added service businesses margin increased $3 million amounting to $24 million related with the public lighting and infrastructure projects. Before we start to review our financial result, in Slide 3, I would like to focus on the market context in which we operated.

The Chilean economy remained flat with no relevant growth. The GDP growth for '17 is expected to be 1.5% mostly explained by lower performance of the mining sector contribution, together with a reduction of private consumption and greater public expenditures.

Energy sale in the SIC system -- electricity system increased 2.1% totaling 39 TWh. It is important to mention that in our concession area, sales increased 3%.

Regarding hydrology, 2017 continued to be classified as a dry year with the system reservoirs level of 16% from maximum energy stored.

With respect to reservoir relevant to Enel Generación, available energy for generation decreased 32% compared to 2016, reaching a total of [374] GWh. Average spot price in the SIC remained stable $80 per MWh as a consequence of lower water availability and higher commodity prices.

With respect to the average exchange rate, we faced an appreciation of 3.8% of our currency versus the dollar, which negatively impacted our generation sale denominated in dollars.

Now I hand over again to Raffaele to go through the economics.

Yes, thank you, Nicola. Please join me in Slide 4 to explain the most relevant key performance in our generation business. Installed capacity presented no variation, amounting to 6.4 GW. Net production decreased 5% amounting to 12.7 TWh primarily due to a 936 GWh of lower hydro generation as a consequence of the drought that affected the south of the country during the first 9 months of 2017.

213 GWh increased oil and gas generating due to higher generating by [Quintero] and [Taltal] offset by 250 GWh of lower combined cycle generation.

337 GWh increase in cost generation due to a higher availability of [Bocamina I and II] in [Tarapaca]. Physical energy sales decreased by 3% or 600 GWh as of September 2017. Finally, due to 150 GWh lower contracted sales due to less consumption of distribution companies offset by higher sales to free client.

454 GWh 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 changing our mix of customers.

Now let's go to Slide 5. Regarding our distribution business, physical energy sales increased 362 GWh primarily due to higher sales to residential customers, higher tolls of 300 GWh offset by lower sales to industrial customers of 76 GWh and to municipalities and public parties of 68 GWh.

Customers rose by 3% or 55,000 during this period mainly in residential reaching 1.9 million clients. With regard to our interruption index the rates increased by 27% as a consequence of the exceptional rain and snow occurred in June and July 2017. Energy losses remained stable at 5.2%, very close to technical losses.

Now I would like to review our financial information. On Slide 6, let me highlight the most important financial consolidated changes as follows. Revenues decreased 5% amounting to $2,827 million primarily due to our generation business.

EBITDA decreased 12% amounting to $770 million mainly affected by the performance in the generation business. Depreciation amortization impairment expense decreased by $11 million so an expense of $182 million, a mixed consequence of applying a new accounting criterion that increased the useful life of fixed assets and the result of an increasing investment that went into the operational level.

Net financial result increased to an expense of $24 [billion] mainly due to lower net exchange [FX] of $70 million as a consequence of the Enel Américas debt payment in 2016 and also bank debt repayment.

Other nonoperating results decreased $30 million basically as a consequence of the sale of Electrogas on February 2017 offset by the sale of GNL Quintero on September 2016.

Taxes increased $31 million primarily as a consequence of higher corporate tax rate, dollar benefits from CPI indexation and exchange rates.

Given all the information, net income attributable to energy list shareholders decreased 21% with a $103 million amounting to $378 million.

In Slide 7, you can see each business' contribution to our EBITDA. Generation, EBITDA decreased 15% or a $103 million, explained by lower energy sales for $136 million primarily to regulated customers mainly due to the [migration] to free clients and in the spot market partially offset by higher sales to free customers.

Additionally, during this period the contracted average sale price decreased from $93 to $91 per MWh. Lower other fixed operating costs of $56 million as a consequence of the relinquish of water rights associated to specific projects booked in September 2016.

In distribution EBITDA decreased 3% or $6 million mainly explained by higher fixed operating costs for $6 million primarily due to nonrecurrent extraordinary bonds paid to employees as a consequence of negotiation with unions.

Regarding our operating performance, we maintained our margin in $360 million as a consequence of higher revenues of $20 million due to higher energy sales to Residential customers and tolls. Better performance of $3 million of our non-regulated businesses related with infrastructure projects and public lighting offset by higher other variable procurement and services cost of $19 million mainly due to the fine provisions and voluntary compensation made as a consequence of the rain and snow event in June and July 2017.

Now please join me in Slide 8 to show recurrent gross margin breakdown for our distribution business isolating the fines provision and voluntary compensations made due to the snow and rain events in June and July. Total recurring margin increased 3% in respect to September 2016 due to $9 million of better margin in the regulated business as a consequence of higher sales and better mix.

Regarding non regulated businesses VAS, value added services registered an increase in margin of 13% or $3 million as a consequence of better results in public lighting and infrastructure projects due to tenders won in different areas in the country reaching around 300,000 light points in 34 municipalities. Physical sales to the free market increased by 20% as a consequence of new contracts with free customers and potential free customers inside and outside our concession area.

Now please let's go to Slide 9 where we can see funds from operations that amounted to $490 million after tax payment. Working capital needs and financial expenses. It's important to note that our funds from operation fully covered our maintenance and growth CapEx of $257 million.

Regarding net dividend, we paid almost $400 million of which $147 million were paid to the parent company and $248 million to third parties. As you can see Enel Chile benefits from a strong and healthy financial position to face its daily operation and future opportunities to come.

Now let's go to Slide 10 to focus on our investments. Gross CapEx reached an amount of $257 million. From this total amount $182 million was used in the generation business and $75 million in distribution. Maintenance CapEx reached an amount of $72 million, $44 million in Enel Generación, primarily in our thermal facilities due to improvement in the performance of Bocamina. $27 million in Enel distribution mainly increased of our network capacity and maintenance.

Gross CapEx reached an amount of $185 million from the total $138 million from [Generación], $130 million explained by [Los Cóndores]. Let me comment that during the last 2 months we have had some technical difficulties related to the geology of the area and we have been implementing different solution to solve this. As a consequence we are expecting a delay in the commercial operation of the project for 2020 and approximately 20% increase in CapEx. Going to distribution we have $47 million mainly for customer connections, quality of service and electric relocation.

Now we go Slide 11 let's take a look to our financial situation. Total gross debt remain stable amounting to $1,270 million. Of the total gross debt almost all of the amount correspond to bond issuances both international and local of our generation business. Notice that we do not have any important upcoming maturity with third parties in the next 3 years.

Now I will pass the call to Nicola again to update you on the Elqui transaction.

Yes, regarding the restructuring process, Elqui, on Slide 12 let's take a look to the summary of valuators and appraisers key outcomes. In all the cases the main methodology used was DCF. We can see an overlap area in the different values of all reports. This implied that the transaction contributes to the interest of the company and its shareholders.

In respect to the price per share, the tender offer to Enel Generación ranges between CLP 534 and CLP 595 per share versus the CLP 489 per share before the announcement. When we look at EGP, Green Power Chile, there is a consistency in the ranges that show similar and comparables equity values between $1.5 billion and $2 billion.

Please, in the next slide, let's continue with the exchange ratios of the different companies. So in Slide number 13 we see that the exchange ratio between Enel Generación Chile and Enel Chile was defined in a minimum of 6.4x and a maximum of 8.5x. Exchange ratio between Enel Green Power and Enel Chile was defined in a minimum of 12.5x and a maximum of 19x obviously, it is important to consider the overlapping areas.

Regarding the tender offer over Enel Generación the final FX will be a mix of cash and stocks. This cash portion could range between 60% and 65% according to the different evaluators report. Finally, different combination of the data point should be compliant with the condition of the transaction.

And now let's move to Slide 14 to have a look to the indicative transaction timetable for the next month. On November 10, the Board of Directors of Enel Chile will present its transactions proposal and summon the extraordinary shareholders meeting to vote on the transaction on December 20.

Following November 10 we will be holding a conference call to explain the main characteristic of the transaction. And after the extraordinary general meeting our goal and all terms will be public, we expect to have a [rush] with both international and local investors.

So we are expecting to start the tender offer in mid February lasting for a period of 30 days, approximately. And Italy is finishing this part of the transaction during the first quarter 2018. The merge between Enel Chile and Enel Green Power Latam will take effect once the condition of the tender offer will be verified.

And then let's go to the Slide 15 to make some final consideration as a summary of the most important issues occurred during these 9 months. EBITDA from our generation business was affected by poor hydrology coming from the previous year that was compensated by higher availability of our thermal capacity. I want to highlight that we have a robust long term contract portfolio that perfectly edges our production capability.

The fourth quarter of 2017 shows better perspective in the hydrology due to the improvement of the melting of the snow with regard of the same period of 2016. Stable and well-diversified EBITDA in the distribution business thanks to organic growth and no regulated business margin is characterizing this 9 months result. As well as a growing tendering free market volume sales.

Reorganization process the project Elqui is scheduled -- is going on as scheduled, independent evaluators' and appraisers' final reports were received and published last Friday.

Thanks to the synergies between Enel Generación Chile and Enel Green Power we won 54% of the 2.2 TWh per year offering the tender and awarded last week. We won more than any other participant. The energy awarded to Enel will be provided by a mix of new renewable product comprising of solar wind and geothermal for a total capacity of 2,042 MW. The combination of different renewable technologies on thermal generation has proven once again the winning approach.

Finally, let me tell you that we will continue to focus on maintaining our leading position in Chile and to comply with our target despite the challenging scenario that we were and are facing.

This concludes our review of Enel Chile financial result as of September '17. And now we'll be glad to answer any questions you might have. Operator, please?

(Operator Instructions) Our first question comes from the line of Enrico Bartoli with Mainfirst.

Good morning, thank you for taking my questions, a few of them please, first of all on the power generation business if I'm right say in the third quarter there was an increase in EBITDA compared to last year. Could you elaborate a bit on the margin evolution compared to third quarter '16, I guess, there were also some one-offs, negative one-offs probably last year. And the trend that you expect, you commented that in the fourth quarter you expect some improvement in the margins. Could you please elaborate a bit on this and possibly -- given as also your expectation for 2018? Then I have a question regarding, Slide 6, you show a very significant reduction in the fixed cost, around 20%. Could you provide some details about this and update us on where you are compared to the target of the current business plan. And last one, you mentioned an increasing CapEx and delay in the startup of some projects in the medium term particularly Los Cóndores. Could you provide also some details of the reason of this and on where you expect the CapEx to be for these projects and the startup of the project itself?

I would say the first and the second question are linked because if we compare the third quarter 2017 with the third quarter 2016, we have an important reduction in fixed cost of $55 million this is due to the write-off we did in the third quarter 2016. If we do not consider this write-off, our OpEx are on track. This I will say is the main variation that can explain the difference between the third quarter 2017 and 2016. We had an increase of EBITDA more or less $22 million of which as I just told you, $55 million are for lower cost due to the write-off that we had last year. With regard to Los Cóndores I let Nicola give you a bit more details.

Yes, Enrico, so as I mentioned before we found some let's say geological problem during the work and the project of Los Cóndores. But anyway it's already reached almost 60% of completion, so it's at a very advanced stage. We are working with technician, geologist and all the experts we have in order to reassess the right way to go on with the work, let's say speeding up as much as possible to recover the delay that we had till now and the work is under way to get to a final alternative solution. What I mentioned before I can confirm at the moment, our expectation is to have a delay and to have the startup of the project [nub] at the beginning of 2019, but during 2020, and to have an increase of CapEx of above 20%. We expect to have some final precise figures in more or less 1 month. So when we will have that call above the business plan, the new business plan we will let you know more about it.

Thank you, just very quickly on the first question, net of the one-off related to the write-off, could you elaborate a bit on how you see that let's say the clean margins in power generation compared to last year and what you expect for the next quarters?

Yes, okay, so the margin in this quarter is of about $280 million, and as I commented, it's slightly lower the previous period if we do not consider this exceptional write-off. With regard to the fourth quarter, the fourth quarter has begun very well from a rainy point of view. Of course, we can't totally recover the difference in EBITDA that we have accumulated so far.

And our next question comes from the line of [David Galante] with Scotiabank.

Thank you, just a couple of questions, could you confirm us the news that local press are stating regarding that you would not appeal the latest court decision regarding [hydrosen] and if you decide to terminate the company and return all the water rights, could you give us maybe a preliminary estimation of the costs. My second question is regarding the fine in the Enel distribution Chile statements. You stated that in August regarding the weather you said this, in July you got a 70,000 UTM fine. Is this already final decision and if it is, is it already in the balance sheet?

I will answer to the first question, yes, about hydrosen, and the issue is the following, we as Enel already communicated since October 2016, our intention to leave the project to quit the project, this is what we confirm, but there is a company where we are partner of [Colbun] and as publicly mentioned we are dealing with the partner in order to find an agreement to dissolve the company, and of course our intention is to give back to the state their water right. This is still our position, cannot anticipate any firm conclusion because of the negotiation in place with Colbun. But of course I can repeat our intention is to leave the project, to abandon the project as stated already 1 year ago. Then I leave to Raffaele for the second question.

Yes, just to conclude the first question, with -- giving back the water rights we will shave the next year more or less $3 million and giving back this water rights shouldn't imply any further write-off because I remind you that we already have written off most of the projects. On the other side, there might be a fiscal benefit from this. Now going to the question of the fines. At September 30th we have provision $8 million with the concept of $5 million of fine and $3 million of indemnification and reimbursement. We have not been notified yet of further fines. So for this reason of course we have not [included] any of these in our financial statement at September 30th.

(Operator Instructions) Our next question comes from the line of [Arturo Moro] with Santander.

Thanks for taking my question, my question is regarding the immigration of client. How much gigawatts per year do you expect will continue changing from regulated to non-regulated clients?

The market of potentially free client is of about 8 TWh, of this 3.6 TWh have not migrated yet. The other 4.4 TWh have been migrating or are in the process of migration. Of this 4.4 TWh as in a group we have already signed contracts for almost 60%. That means that 2.6 TWh of these 4.4 TWh has already became finished clients even though part of this energy will be sold only beginning from 2018. We do not know about the 3.6 TWh that I mentioned that have not began a process of migration, if they finally will migrate. We expect this is possible in the next 2-3 years.

Thank you, and I'm not showing any further questions, so I'll now turn the call back over to Raffaele Grandi for closing remarks.

Okay, thank you, 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 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 call today. Thank you very much and have a nice day.

Thank you all, bye.

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone have a great day.