Enel Chile SA (ENIC) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Enel Chile's First Half 2018 Results Conference Call. My name is Gigi, 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 are described in Enel Chile's press release reporting its 1H 2018 results.

The presentation accompanying this conference call and Enel Chile's annual report on Form 20-F, including under Risk Factors. You may access our 1H 2018 results press release and presentation on our website, www.enelchile.com, and our 20-F on the SEC's website, www.sec.gov.

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

I would now like to turn the presentation over to Mr. Nicola Cotugno, Enel Chile's CEO. Please proceed.

Thank you. Good morning, ladies and gentlemen, and welcome to Enel Chile's First Half 2018 Results presentation. I am Nicola Cotugno, CEO of the company. Joining me today is Raffaele Grandi, CFO of the company; and Ms. Susana Rey, Enel Chile's Head of Investor Relations.

In this presentation, I will provide some highlights of the semester and take you through the operational performance.

Then, I will hand over the presentation to Raffaele to comment on our financials.

We invite you to follow along with the presentation uploaded to our website. And as always, we will have the usual Q&A session open to those connected on the call.

Let me start with the highlights of the period. Enel Chile's reported an EBITDA of $556 million, $52 million -- $54 million or 11% higher versus last year, whilst attributable net income decreased 28% amounting to $200 million due to the extraordinary gain of the sale of Electrogás booked in 2017. Excluding this positive effect, net income would have maintained stable. In generation, EBITDA growth is mainly explained by $57 million as a consequence of the consolidation of EGP and by $70 million, driven by a better generation mix due to improved hydrological condition in the system.

In distribution, the contribution margin maintained stable within the semesters. As per the group simplification, restructuring process is fully completed, and we have started to consolidate 100% of EGP Chile and additional 34% of Enel Generación Chile since April 2.

In respect to the refinancing, we are pleased to comment that despite volatile market conditions, on June 7, 2018, we successfully issue our first billion dollars Yankee bond due in 2028, the use of proceeds in debt refinancing and general corporate process. The notes were rated Baa2 by Moody's and BBB-plus by Standard & Poor's, both with stable outlook.

Last but not least, Enel Chile Group was included in the FTSE4Good Series Index from June 2018.

Well, before starting with the analysis of our results, I would like to take some minutes to comment on our restructuring process, Elqui, that we successfully concluded this semester. Since April 2, we have started to consolidate 100% of EGP Chile and additional 34% of Enel Generación Chile, consolidating our position as the largest utility player in Chile. We position as an undisputed leader in power generation with 7.5 gigawatt of installed capacity and the largest renewable platform in the country, with more than 4.7 gigawatt.

In the next year, we are going to develop 1.1 giga of new projects, adding approximately [15%] of renewable capacity to our current portfolio, 78% of this new pipeline as synergy with plants under operation, with short time to market and with an actionable based on commercial opportunity.

Enel Chile now have the best diversified industrial profile with a clear path to growth and benefit from the different opportunities to come.

In respect to our financial position, we already refinanced a significant portion of the debt incurred by -- incurred to finance Elqui, concluding this semester with an optimized financial structure with a sustainable dividend policy.

Let's go to Slide 4 and let's move to the operating analysis for our generation business of the semester. Installed capacity increased 19%, amounting to 7.5 gigawatt, explained by the additional 1.2 giga renewable capacity to our portfolio coming from EGP.

Net production increased by 11%, amounting to 9.3 terawatt hour, driven by 865 gigawatt hour of high production, generated primarily by Ralco, Pangue, Pehuenche and [sepressa]. 760 gigawatt hour of higher additional renewable generation coming from EGP, of which 358 gigawatt hours come from the wind and 241 gigawatt hour from solar. As a consequence of the aforementioned, we were able to decrease by 394 gigawatt hour in the combined cycle generation and by 213 gigawatt hour in the oil and gas generation in Quintero and Taltal and 94 gigawatt hour of lower coal generation.

Please note that we have seen a recovery of hydrology during this year. With the exception of Rapel, the level of water in all our reservoirs is higher than in 2017.

Physical energy sales increased by 1% or 99 gigawatt hours due to 879 gigawatt hour of higher contracted sales with 3 customers, offset by 727 gigawatt hours lower consumption of distribution companies and 53 gigawatt hours lower sale in the spot market.

And now let's move to distribution business in Slide #5. Electricity distributed increased by 2%, driven by higher tolls of 293 gigawatt hours due to higher sales from our companies that use our grid, offset by lower sale to industrial customers by 99 gigawatt hour and commercial customer by 15 gigawatt hours.

Customer number rose by 3% or 50,000 during this period, reaching 1.9 million clients, thanks to the increase of residential customers.

With regards to our interruption in the SAIDI, that considered the last 12 months of operations shows similar level in respect to last year. Please have in mind that these 2 indicator were negatively affected by exceptional levels of rain and snow during June and July 2017. So for the second half of 2018, we expect an important improvement due to our operative plan in execution and because we don't expect extraordinary weather events.

Energy losses remain stable at 5.1%, very close to technical losses.

And let's move to sustainable value creation on Slide 6. We see a growing attention to the sustainability of the business models, with a specific focus on risk and opportunities associated to the climate change. The company believes that the climate change will have a significant impact across many sectors and that we, as business leaders, have an important role to ensure transparency around climate-related matters. To date, we have set up a multidisciplinary working group around 3 main activity clusters, developing long-term client scenario based on the location of our assets, mapping the impact of climate-related risks and opportunity on the reorganization business and long-term strategy and financial planning and developing the related financial reporting package.

As a part of testimony of our commitment to a sustainable strategy, Enel Chile participated to different working groups on climate change so as Acción Empresas, CLG (Líderes empresariales contra el Cambio Climático), Pacto Global Chile and Latam.

Let me highlight that since June 2018, Enel Chile has been included in the FTSE4Good Series Index, in light with the Enel Index strategy -- sorry, Enel Group strategy as previously mentioned.

And now, I will pass the call to Raffaele to comment on our financial situations.

Thank you, Nicola. Good morning, everyone. First on Slide 7, let me make a financial summary for the half. Reported EBITDA is up by 11% to $556 million. Attributable net income stands at $200 million, with a 28% decrease versus last year, driven by the extraordinary gain booked in 2017 due to the sale of Electrogás. Excluding this positive effect, net income would have remained stable compared to the first half of 2017.

CapEx increased 79%, reaching $231 million as previously mentioned. Company net debt reached $3.7 billion, mainly explained by consolidation of Enel Green Power Chile's debt and the new debt issued by Enel Chile to finance the Elqui project, while funds from operations stands at around $310 million, 87% higher than 2017.

Let's now have a look at group EBITDA by global business lines on Slide 8. EBITDA generation amounted to $430 million. The 21% increase is attributable to lower energy purchases by $91 million, partly explained by 721 gigawatt hours of lower contracted purchases. This lower cost includes the positive contribution of Enel Green Power in Enel Chile, which generated a cost reduction of $48 million.

Lower fuel cost by $72 million due to lower gas and coal consumption. This is offset by lower sales for $80 million, mostly as a consequence of lower average sale price in pesos.

EBITDA from distribution business is $8 million lower versus last year, amounting to $145 million. The evolution of the EBITDA is associated with lower contribution margin of $3 million, mainly due to lower energy margin of $2 million and lower performance of our nonregulated businesses for $3 million related with public lighting. This is offset by a better performance of $2 million of other regulated business. We had the higher OpEx for $500 million, mainly explained by higher maintenance expenses, offset by the decrease in extraordinary and nonrecurring bonuses granted to employees in the previous period.

Now please let's go on Slide 9, where we can have a deeper look at the main drivers of our net ordinary income. Depreciation and amortization increased by $28 million, thanks to the addition of the assets of Enel Green Power in Chile; this accounted to $32 million. Financial results amounted to an expense of $63 million, an increase of 281%, mainly due to $25 million of higher financial expenses of Enel Chile's new debt and $80 million from the consolidation of Enel Green Power Chile.

Other nonoperating results decreased by $173 million due to the sale of Electrogás booked on February 2017.

Taxes decreased by around 35%, primarily as a consequence of lower tax expenses, as a consequence of the sale of Electrogás in the previous year.

Minorities net income decreased by 57%, mainly as a consequence of the higher stake of Enel Chile in Enel Generación Chile since April 2. Given all the aforementioned, ordinary net income decreased 28%. If we exclude the sale of Electrogás in February 2017, reported net income would have maintained stable.

Now please let's go to Slide 10. We can have a look at the CapEx executed in the first half 2018. Maintenance CapEx increased 47% versus 2017, $12 million of this in our generation business, primarily due to scheduled maintenance in our thermal facilities, $4 million in our distribution business due to higher load increase and corrective maintenance.

Connection CapEx increased 175%, $12 million primarily explained by connection due to greater request from residential customers and network movements. $2 million considered a growth investment in line with our strategy to digitalize our grid has improved our network.

Growth CapEx increased 83%, $61 million in renewable generation explained by Los Cóndores. Important to mention that we reached a 67% level of completion. $7 million in thermal generation explained by Bocamina south dome, $3 million in Enel Distribución, mainly related with smart meters.

Now please let's go to Slide 11, where we have a look at our cash flow. Fund from operations amounted to $311 million. It is important to note is that our positive free cash flow fully cover our maintenance and growth CapEx of $231 million. Net free cash flow after dividends and CapEx stands at negative $287 million, mainly due to the dividend payment executed in January and May this year. Regarding net dividends, we paid $368 million, of which $340 million were paid to Enel Chile's shareholders.

Now on Slide 12, let's take a look to our net debt. Our gross debt increased by about $2.7 billion versus December 2017, amounting to $3.9 billion, primarily as a considerance of $1.7 billion, raised to finance a tender offer for the Enel Generación, the withdrawal rights of the Elqui project and the consolidation of the new debt of Enel Green Power Chile.

The average cost of our debt decreased to 5.2% versus last year, explained by a lower interest rate of Enel Green Power Chile and Enel Chile debts. Our net debt increased by $3.1 billion, mainly due to negative free cash flow after CapEx and dividend of $287 million, the consolidation of Enel Green Power for $1.1 billion and the 34% additional stake of Enel Generación for $1.7 billion. We had a bridge loan for around $500 million maturing in July 2019. We expect to refinance it during 2018. Besides that, we have an annual average of $200 million maturing in the next 5 years.

Now I will pass the call to Nicola for closing remarks. Please, Nicola.

Thank you, Raffaele. To end this call on Slide 13, I would like to make some closing remarks. First half '18 results increased 11%, showing recovery from adverse scenarios, particularly as a consequence of better hydrology and the consolidation of our renewables business.

This has allowed to rely less on thermal production and optimize variable cost, so confirming the opportunities deriving from a diversified mix. The increase in EBITDA was and will continue to be fueled by growth in renewable and network, in line with our strategy. Funds from operation -- generation proved to be solid, thanks to our operating growth.

Additionally, after the restructuring process, we are proud to comment that we optimize our financials structure.

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

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

Operator?

(Operator Instructions) Our first question is from Ezequiel Fernández from Scotiabank.

I have 3 questions. I would like to go one by one, if you don't mind. The first one is related to the Los Cóndores project. I would like to know if you have a final CapEx number for the total project and how much remains to be spent.

Yes, Ezequiel. Raffaele speaking. Yes, it's the same number that we communicated a few months ago, that is around $910 million.

Sorry, could you repeat that, please?

Yes. It's the same number that we had already communicated to the market that is almost $940 million.

Okay, perfect. And how much do you still need to spend on that?

Okay. So far, our cumulative CapEx is $550 million. So, of course, the difference is more or less $380 million, $390 million.

Okay, perfect. Very clear. And my second question is related to the holding expenses. For the first half of the year, they were like $19 million, $18 million of that came on the second quarter. My line broke up a little bit while Raffaele was commenting on the financial results. So sorry if you already mentioned it, but could you tell us why the big jump in the second quarter?

I mean, if we are just talking about the holding company cost, it's just because of the Elqui project. We had more or less $10 million cost for Elqui project that they are, of course, extraordinary costs and they will not repeat, of course, in the other quarters.

Okay. So out of that $19 million, you have $10 million which are nonrecurring from the IT project. Okay, perfect. That was very clear. My third question is related to Sempra and Chilectra. Sempra is undergoing some discussions internally with some investors. And they said that they would be willing to sell Chilectra. I want to know if that's an asset that interests you. And whether there are some regulatory or balance sheet considerations that might prevent you from being interested?

Listen, the asset of Sempra is Chilquinta. Of course, it's a good distribution company, but we are not actively moving in any negotiation or in any real effort towards considering this as a deal -- as a possible deal. It's an interesting company. As always, we're looking what is happening in the market, but there is nothing concrete on the table, let's say, and in our horizon.

Our next question is from Guillermo Soler (sic) [Guilherme Soler] from APIU (sic) [Itau].

Actually it's Guilherme from Itau BBA. I was wondering what you guys are looking for to grow for the next years? Is there any M&A or are you guys looking for any kind of new green projects going on? Can you explain further a little bit on your [guys] the long-term projections for you?

Yes. Listen, in the next few years, we are going to build more than 600 megawatts of new renewable nonconventional capacity, mainly solar, a big part wind, and some other geothermal capacity. As we mentioned, the bigger part of that would be based on expansion of power plants already in operation. So with a very fast track to be on operation and a very high certainty about cost and time. So this will be characterizing the horizon of the next few years. So growing thermal capacity and delivering new base to our sales portfolio.

Just one more question, if you allow me. Can we expected a better hydraulic condition for the next couple of years as well?

Of course, we are expecting that, because despite the fact we told this year we are in a recovery mode, let's say. So still we are approaching what our normal hydrological conditions, still are really not a normal hydrological condition. So there is an upside for sure in the long term, as an average at least, that is still not expressed by the numbers of this year. So production can grow more than 1 tera per year, but despite of that midterm expectation, already the year is going pretty well. So we are on the right track.

(Operator Instructions) Our next question is from Arturo Murua from Santander.

My question is regarding to Enel Distribución. In the line of other expenses in the second quarter it jumped 42% higher. And I think it's related to the trimming plan. If you could give a bit of color about this plan and if this is just a one-off or we should expect a higher expenses -- other expenses in for the second half of the year?

Yes, good question. The trimming and pruning plan was started last year as a consequence of the failure we had during the extreme weather condition. But this time, let's say, [at least continuity] in the methodology we could do the trimming, because before the time the municipalities didn't allow us to make something, let me say, deep. So with this plan of extreme trimming, we should have the situation in a way that is different from the previous one, but then from now on we require just, let me say, a yearly maintenance and not such a big step in terms of changing the activity. So to go straight to the answer, we don't expect such a big cost as this year because this was the year of the discontinuity, and we have to realize a very deep and profound activity in trimming that in the future will be just a normal maintenance -- yearly maintenance.

Our next question is from Ezequiel Fernández López, from Scotiabank.

I wanted to ask a question regarding the guidance on the contracted status, the sales going forward long term that you have in your May 2018 presentation. I wanted to know if this projection that you gave that it's well into next decade accounts for any risks related to distributed generation. And if it also includes the El Campesino contracts?

Yes. Let me say that distributed generation is still not [at the top]. Chile is growing very little, and we don't see (inaudible) the current scenario and the evolution, that any disruption (inaudible) much of these project. I mean, in terms of sales, it's already in the (inaudible). We will update in next calls, but I want to say that we will not conclude (inaudible) last month. So the situation is developing in a very positive way.

Okay, perfect. And I have one final question. If you could tell me and maybe this -- maybe we can do it off the call, but if you happen to have right here the allowed regulatory losses for Enel Distribución Chile for this year, I think it's called [actores] pension actually in Chile and for 2019 and 2020 that would be great. Otherwise, we can do it by e-mail.

We -- sorry, maybe I didn't understand. I didn't get completely your question. So we are now performing around 5% and we proceed to move around this number because we are really, let me say, almost at [NCE] to those. We don't expect tremendous improvement. On the other side, as I mentioned and maybe was not so clear, we expect to improve so much more on interruption number or interruption duration so the technical performance will increase -- will improve. And from a regulation point of view, this is the level considered by the regulator, maybe if this was the point that was missing, the 5%.

Our next question is from Ankur Agrawal from Societe Generale.

Just 2 very basic questions from my side. Can you discuss the pricing environment in Chile for the first half of the year? And how do you see it developing for the rest of the year in terms of the realized price as well as the spot prices? And the second question is, could you explain the reason behind the decline in sales to regulated customers for the generation segment? That's it from my side.

See, in the first semester, the average spot price was around $67 and was characterized by some period of high spot price because was lacking some thermal CCGT capacity, and this impacted on some high prices in one month. We expect this to go down in the next month for the regulatory -- the regular or the better hydro condition we mentioned and the fact that all the thermal fleet of Chile, not only our, is operating very well. And in the mid long-term, we expect spot prices will be characterized by the impact of integration of the north grid with the central grid of Chile that will levelize the prices to the bottom. Can you be so kind to repeat the second question? Because it was very difficult to hear you.

Sure. Could you explain the reason behind the decline in the regulated sales in the generation business? There is quite a material decline of around 700 tera -- 700 gigawatt hour.

Yes. The regulator sales decreased by -- yes, this 700 gigawatt hour you see in Slide 4 mainly due to, yes, lower consumption by a single consumer. So it's not that we have lost portfolio. It's just that due to weather conditions, seasonality, holidays and so on, the effective consumption was [showing this strength] that we don't associate with any change in the structure, our business or our portfolio. So we'll be, for sure, influenced and was influenced by weather condition, more sunny days, blah, blah, blah. So we see business seasonal kind of impact to be -- mainly recover in the next month.

Just one small follow-up on the prices. So do you expect electricity prices to further worsen for the second half given the strong hydrology? And what impact would it have on the realized price, if any?

First of all, I want to remind that we are very marginally affected by spot just for financing volumes, being covered for the bigger part by long-term contracts that already fixed our revenue. On the other side, I confirm that we don't see any special attention on the spot price market and this is something that will characterize the next semester and, as I say, the next year's due to the fact that the integration of the north and central grid will put in a better condition, the dispatcher, the central dispatcher in using the best sources in most of the hours. So I don't expect any increase in the prices, any tension in the prices. And, of course, a melting condition, bigger volume from water could characterize generally the second half for lower prices as every year.

Our next question is from Andrew McCarthy from Citi.

I just had a follow-up on the distribution segment. We saw in the second quarter that the EBITDA fell by 20% year-on-year. I just wanted to check in that context, whether it's still reasonable to assume your management plan targets. I think for this year, you've got USD 298 million and then USD 365 million further out in 2020. If you could provide any color on that, that would be really helpful.

Yes, thank you, Andrew. No, I mean, we do not see any danger in reaching our targets because this quarter has resisted some exceptional nonrecurring cost towards the previous year, and they tell you more that we expect an increase in the second half towards the same period previous year because last year, we registered some exceptional costs that, of course, we do not think they will repeat. So our estimation maintain the same, even though there's little change in this quarter. I also want to remind you that we had a decrease of more or less $3 million in our added value services because of a nonrecurring profit that occurred last year, that has not been repeated this year with regard to public lightings.

I would invite if I can compare, Raffaele, to consider that this year despite we were talking about exceptional weather condition last year, we had very similar events of snow, extremely strong wind, a lot of rain in Santiago. And as you can see from the technical performance, our grid was not affected. This means that, of course, we had to address some new activities on the grid to improve the quality and the resilience and this is already showing up the good results that will be kept in the future. So we don't have to repeat the same activities in the next quarters and we will preserve a good performance.

At this time, I'm showing no further questions. I would like to turn the call back over to Mr. Nicola Cotugno, Enel Chile's CEO, for closing remarks.

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

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.