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Edited Transcript of ENERSIS-CH.SN earnings conference call or presentation 31-Jul-19 2:00pm GMT

Half Year 2019 Enel Chile SA Earnings Call

SANTIAGO Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Enel Chile SA earnings conference call or presentation Wednesday, July 31, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Isabela Klemes

Enel Chile S.A. - Head of IR

* Marcelo Antonio De Jésus

Enel Chile S.A. - Manager of Administration, Finance & Control

* Paolo Pallotti

Enel Chile S.A. - CEO

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Conference Call Participants

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* Andrew J. McCarthy

Citigroup Inc, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Enel Chile's First Half 2019 Results Conference Call. My name is Chris, and I'll be your operator for today. (Operator Instructions) As a reminder, this call will be 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. 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 first half 2019 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 first half 2019 results press release and presentation on our website, www.enel.cl, and our 20-F on 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 undertake no obligations 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 Ms. Isabela Klemes, Head of Investor Relations of Enel Chile. Please proceed.

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Isabela Klemes, Enel Chile S.A. - Head of IR [2]

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Good morning, ladies and gentlemen, and welcome to Enel Chile's First Half '19 Results Presentation. I'm Isabela Klemes, Head of Investor Relations. The presentation will be hosted by Paolo Pallotti, our CEO; and Marcelo de Jésus, our CFO. Paolo will walk you through the main highlights and evolution of our strategy and our operation performance. And Marcelo will detail our financial results.

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

Thank you all for your presence, and now let me hand over the call to Paolo.

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Paolo Pallotti, Enel Chile S.A. - CEO [3]

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Thank you, Isabela. Good morning, ladies and gentlemen. Let's start then with highlights of the period. Our first half results show renewable contribution in our generation business. The additional 1.2 gigawatt renewable capacity through EGP consolidation continues to improve our mix and our generation EBITDA margin.

On renewable side, we are putting in place a very clear and straightforward strategy to serve our clients' needs, and we are on track in developing our project, in line with our plan.

In addition, aligned with our strategic plan, we signed on last June 4 an important agreement with the Minister of Energy on which we had defined the progressive closure of our 600-megawatt coal-fired plants. I'll provide you more details on this agreement on the following slides.

On the customer centricity strategy, we continue targeting long-term partnership with our clients, seeking the stability of our cash flow. In this way, we have signed 2 PPAs for 100% renewable energy supply worth up to 4 terawatt hour, starting in the 2020-'21 period for 10 years duration each.

Contributing with the energy transition in Chile, we recently signed a new agreement with a local transportation operator to add additional 183 electrical buses to the city of Santiago.

In infrastructure and networks, we continue to focus our investment in improving our network resilience, quality of our services and efficiency.

I will give you color on our main investment in the following slides. All in all, EBITDA growth for this semester was 59% with margin improvement from 30% to 38%. Our adjusted net income excluding the nonrecurring effects reached an increase of 27% in the semester.

Last but not least, our operation continues to contribute with our SDG targets. I will also share with you more details on [ICG] approach and our contribution to SDGs.

Slide 2, decarbonization process in Chile. Our subsidiary Enel Generación and GasAtacama signed a voluntary agreement with the Ministry of Energy on the 4th of June this year to proceed with the progressive closure of the coal-fired power plants of Tarapacá, Bocamina 1 and Bocamina 2. Last week, we received a green light from the National Energy Commission to proceed with the anticipation of the closure of Tarapacá power plant on December 31, 2019, as requested by our company.

The anticipation of the closure of this coal-fired plant was also possible after the integration of the SING, Sistema Interconectado del Norte Grande with the Sistema Interconectado Central through the line Cardones-Polpaico.

As a result of these agreements, we have booked an impairment loss related to Tarapacá and Bocamina 1 of USD 281 million, which affected our net results of this quarter.

Let me remind you that despite the booking of this impairment, the amount of dividends that will be paid to our shareholders in 2020 corresponding to 2019 net income will not be affected by these important losses.

Following on Chart 2 on decarbonization. During this period, we have signed 2 contracts to supply renewable energy to large clients in the mining sector. The first PPA was signed with Collahuasi with a volume up to 1 terawatt hour per year, starting in 2020. The second, the largest renewable PPA in the country with a volume up to 3 terawatt hour with Anglo American starting in 2021. Both contracts have a 10-year period supply.

On construction side, we have reached 81% level of completion of Los Cóndores, the hydropower plant project. With reference to our renewables development plant, the construction of the first 500-megawatt out of 1.1 gigawatt is in execution and includes geothermal, solar and wind technology. We expect to start the commercial operation of such project by 2020.

On Slide 4, additional action towards the energy transition. The development of the cities is creating a network market for specific infrastructures, such as comprehensive solution of efficient public lighting, urban advertising infrastructure and integrated public safety systems as well as a strong need for more sustainable transportation system.

In this respect, the arrival of the 100 electric buses last year had positioned our company as a pioneer in the electric mobility. This project developed by Enel, Metbus and BYD was recognized by the International Association of Public Transport at the Global Public Transport Summit as the first place winner in the Smart Funding, Financing & Business Models category.

Along this path in the second quarter, we've announced the additional development of the first electric corridor in South America, adding 183 new electric buses to the existing electric fleet based in Santiago.

This corridor will be also developed considering the installation of charging infrastructure and technological bus stops.

Still under e-mobility, we will start in the next month the development of a national electric infrastructure plan by the installation of 1,200 charging points throughout the country during the next 5 years.

Additionally, and thanks to the collaboration with other public and private partners, we are promoting the use of electric efficient heating in order to contribute to reduce the carbon emission in Chile.

Moving to Slide 5, we will see how we have allocated our CapEx. We have reached $186 million in the first half of 2019. Customers CapEx of this period reached USD 24 million in line with 2018 figures.

The main investments were allocated in the construction of 5 new substations, as part of our commitment to improve the resilience of our network and the quality of the service in Santiago.

Asset Management CapEx reached USD 40 million, a slight decrease of $5 million, mainly due to the one-off failure maintenance cost related to the Tarapacá thermal plant in 2018. CapEx in infrastructure and networks was $18 million, mainly on investments associated to load increase, correcting maintenance and health and safety and the environment.

Regarding growth, EGP CapEx development in the period has been offset by lower CapEx in Los Cóndores, with a net effect of minus $20 million versus last year.

On Slide 6, we move to the operating analysis of our generation business. Today, our 7.5 gigawatt of installed capacity is composed by 63% renewable energy, mainly hydro, wind and solar power plants. Net production increased by 13% amounting to 10.5 terawatt hour, driven by 0.8 terawatt hour of higher renewable generation mainly coming from EGP, 0.4 terawatt hour of higher thermal generation due to higher availability of gas in San Isidro Power Plant and higher availability of Tarapacá.

Physical energy sales increased by 3% or 0.4 terawatt hour, primarily due to 1.6 terawatt hour of higher contracted sales with 3 customers, 0.3 terawatt hours of higher sales in the spot market offset by 1.3 terawatt hour of lower consumption of distribution companies mainly relating to the immigration of customers to the free market.

Our recurring generation EBITDA margin reached 42% in the period, excluding the one-off impact from Anglo American.

Slide 7, regarding our network business. Our customer base increased by 2% or 40,000 clients during this period, reaching 1.95 million of clients with a total energy distributed of 8.5 terawatt hour, representing an increase of 3%.

As part of our digitalization strategy, our efforts have been focused on improving our quality of services with the installation of telecontrol equipments and the implementation of different technologies for inspecting our grids. One example of that is the use of helicopters and drones for aerial network monitoring.

On resilience of the grids, we strategically focus in the critical areas for SAIDI and SAIFI, replacing the approximately 31 kilometers of cables in our low tension grids and executing more than 21 kilometers of grid extension and reinforcement. Power interruption index, SAIDI, in the last 12 months shows a 7% improvement with respect to last year.

SAIFI remained stable from 1.67 to 1.66 numbers of interruption.

As part of our effort to enhance efficiency, energy losses decreased from 5.1% to 5%, continuing to be a benchmark for the South America area.

Let me conclude our -- on -- with our progresses on SDGs on Chart #4 -- #8, sorry. At Enel Chile, we manage all our activities with a shared value approach that encompasses communities around us and our employees in the long-term view reflected in terms of beneficiaries on SDGs, the sustainable development goals defined by United Nation, specifically in numbers 4, 7 and 8.

Just for reference, on the SDG 8, which refers to employment and sustainable growth, we have already reached 81% of our commitments for 2021, benefiting more than 360,000 people.

I will also highlight some additional contribution from our operation to SDGs 9 and 11. We are continuing to increase our e-buses fleet, starting from 240 electric car chargers already installed, we are launching a comprehensive national plan for the implementation of additional 1,200 [vans] across the main roads of the country. On cyber risk, 100% of our web application are covered with cyber security solution guaranteeing data privacy.

Looking at climate change, our generation metrics is supporting our journey to a zero emission generation mix. In the first half on 2019, we have reached 58% of emission-free production, and we expect further improvement in the second half of this year due to [sustainability] conditions.

I will now hand over to Marcelo who will go through details of our financial performance for the first half of this year.

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Marcelo Antonio De Jésus, Enel Chile S.A. - Manager of Administration, Finance & Control [4]

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Thanks, Paolo. Good morning, everyone.

Let me present to you the financial highlights for this half of 2019 summed up on Slide 10. Revenues increased 26% or $440 million, primarily due to the higher energy sales, higher sales related to the gas commercialization and the extraordinary income on the early termination of Anglo American's PPA.

Our reported EBITDA was up by $299 million, boosted by the better performance in both generation and distribution businesses and the Anglo American one-time effect in Enel Generación. Therefore, our EBITDA margin grew by 800 bps from 30% as of June 2018 to 38% as of June 2019. Reported group net income decreased 60% or $109 million, mainly due to the accounting effect of the impairment related to the decarbonization agreement signed between our subsidiary, Enel Generación Chile, and the Chile Ministry of Energy in June 2019.

Gross CapEx decreased 11%, reaching $186 million, mostly on asset development of renewables, mainly lower seasonal activities in Los Cóndores and on Bocamina.

Our net debt in the end of June 2019 compared to January 1, 2019, increased $236 million, mainly due to a lower level of cash, dividends payment and higher level of gross debt to support the working capital needs.

Finally, our FFO reached $305 million as of June 2019, in line with last year.

Now on Slide 11, let me show you the drivers behind our EBITDA growth. In our generation business, the EBITDA growth was 73%, including a $105 million growth from our operations in renewables and conventional generation and $170 million (sic) [$179 million] one-off related to the PPA early termination announced in the fourth quarter.

Excluding this one-time effect, our EBITDA in generation business grew by 27% when compared to the first half of last year.

This reflects our continued operating improvement in the generation business, including the important contribution of the 1.2 gigawatt added through EGP Chile.

With respect to the distribution business, which includes infrastructure, networks, Enel X and retail, EBITDA increased by $13 million, mainly due to the recognition of the new technical norm and higher energy distributed.

Holding cost decreased by $2 million, mainly as a consequence of the costs assumed during 2018 for implementing the financing of the Elqui project.

Finally, I would like to highlight that EBITDA growth came along with a better margin, increased to 38% as of June 2019 versus 30% in the same period last year. If we exclude the onetime effect of Anglo American, our EBITDA margin would have rose to 32%. This is the result our strategy focused on a more efficient portfolio of assets through the addition of renewable capacity.

Now on Slide 12, let's take a deeper look at the main drivers of our net ordinary income. Depreciation and amortization, excluding impairment effect, reached $179 million, an increase of $36 million, mainly relating to the addition of EGP assets. Financial result and others amounted to an expense of $109 million, an increase of $57 million, mainly due to the $19 million of higher financial expenses related to the Elqui project and $24 million from the consolidation of EGP Chile.

Taxes decreased by $51 million, mainly as a result of the lower tax expense relating to the impairment aforementioned. Minorities net income decreased by 90% mainly as a consequence of the higher stake of Enel Chile in Enel Generación since April 2019.

Given all the effects mentioned, ordinary net income decreased 60%. If we exclude the one-time effect of the impairment, reported net income would have increased by 95% to reach $354 million as of June 2019.

It's important to emphasize that, as mentioned by Paolo, our dividend distribution of this year will not be impacted by the impairment effect of the decarbonization agreement.

Moving to cash flow on Slide 13. FFO in 2019 amounted to $305 million, which continues to be an important aspect of our business, clearly showing that cash from our operations is sufficient to fund 100% of our current CapEx resulting in a free cash flow.

The net free cash flow is negative as a seasonal effect due to the 2018 dividend payments, which were paid in January and May [this year].

Before the closing remarks that Paolo will walk us through on Slide 13 (sic) [Slide 15], let's take a look to our debt. Our gross debt decreased $169 million versus June 2018, amounting to $3.8 billion, primarily as a consequence of the amortization of the portion of the debt raised to finance Elqui project and local bond amortization, partially offset by an intercompany debt with EFI used to refinance Elqui debt, and a new financial debt due to the application of IFRS 16 among others.

Of the total gross debt, 59% corresponds to bonds and 41% corresponds to loans. As of June this year, net debt-EBITDA ratio reached 2.2x. As of first half last year, net debt-EBITDA ratio was 3x.

The average cost of our debt reached 5.7% as a result of the issuance of a longer-term international bond and the average term of our debt of 6.9 years.

Our net debt in the end of June this year compared to beginning of the year, adjusted by IFRS 16, increased $236 million mainly due to our lower level of cash, dividends payment and higher level of gross debt to support the working capital needs.

In June this year, we paid the bridge loan outstanding for around $200 million, which was refinanced with a 4-year intercompany loan with EFI with an all-in cost of 3.5% [ahead of market benchmark].

In addition, let me highlight that we have refinanced the intercompany loan of Enel Green Power with EFI in the amount of around $600 million, reducing the interest rate from LIBOR plus 4.9% to LIBOR plus 1.4%, thus a reduction of 3.5% in the spreads, which will help us in reduction of our average cost of the debt for this year.

Besides that, we have an annual average of $270 million maturing in the next 5 years. Finally, I want to highlight that we feel comfortable with the leverage level achieved in this period, considering our strong cash generation as well as the next year's expected EBITDA.

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

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Paolo Pallotti, Enel Chile S.A. - CEO [5]

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Before starting the Q&A, I would like to highlight some takeaways. For renewables, in adding renewable capacity to our mix, we are able to provide to our clients 100% renewable long-term PPAs, improving our margin generation and coping with very sustainable growth strategy.

The anticipated closure of our coal-fired plant at Tarapacá as of December '19 is a further step in delivering our strategic plan and sustainable metrics.

The impairment booked on this quarter will not impact our dividends distribution commitment with our shareholders.

On contribution to energy transition, Enel X is implementing a new phase in the public electric mobility with additional 800 -- 183 electric buses in Santiago.

Last but not least, the investment in digitalization and in the resilience of our grids are improving the quality of our service and efficiency of our operation as demonstrated by the financial and operational results of our distribution assets.

All in all, our operating growth, our focus on digitalization and innovation and our commitment on sustainable development goals will deliver our result in the next quarter.

Thank you for your attention. And let's now open the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we do have a question from the line of Andrew McCarthy with Citi.

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Andrew J. McCarthy, Citigroup Inc, Research Division - Research Analyst [2]

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I had a question with respect to the dividends that will be paid against 2019 net income. You mentioned they would not be impacted by the impairment charge you took in the second quarter. I was just wondering, would they be impacted by the exceptional income you got from the end of the Anglo American contract in the first quarter, if you could clarify that, please.

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Paolo Pallotti, Enel Chile S.A. - CEO [3]

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Yes. Thanks, Andrew. Yes, we would like to stress the point that we will deliver our, let's say, dividend based on a pro forma net income that will exclude the impairment effect of decarbonization agreement. This is the effect that we will take into account.

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Andrew J. McCarthy, Citigroup Inc, Research Division - Research Analyst [4]

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Okay. So just to be clear, so you would not incorporate the exceptional income you got from the early termination of the Anglo American contracts in the calculation of this year's dividend payment.

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Paolo Pallotti, Enel Chile S.A. - CEO [5]

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We will include the positive effect.

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Andrew J. McCarthy, Citigroup Inc, Research Division - Research Analyst [6]

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Oh, you will include it. Okay, understood.

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Paolo Pallotti, Enel Chile S.A. - CEO [7]

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Yes. We'll include any positive effect that we may have in the natural management of the business and we will not include the negative effect of the impairment that's affecting our net profit results.

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Andrew J. McCarthy, Citigroup Inc, Research Division - Research Analyst [8]

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Okay. Very clear. And just one follow-up question, if I may. You mentioned being quite comfortable with the current debt levels, just looking at the presentation, 2.2x net debt-to-EBITDA, could you -- what level of net debt-to-EBITDA would start to be maybe at a stretch and you would start to feel less comfortable?

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Paolo Pallotti, Enel Chile S.A. - CEO [9]

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I'll leave this answer to Marcelo. Marcelo?

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Marcelo Antonio De Jésus, Enel Chile S.A. - Manager of Administration, Finance & Control [10]

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Thanks, Paolo. Andrew, thanks for your question. I would say that we should not look at that in a very specific moment. I would say that on long-term basis, for a company like ours, I would feel comfortable with a leverage of around between 2.5x to 3x, even though if for a specific or very specific reason we would need to be including a little bit beyond 3x and then go back to 2.5x or below 3x over time, I would still feel comfortable with that. Again, mainly characterizing and stressing the characteristics of our business by strong cash flow generation. So I don't know if it was clear.

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Operator [11]

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(Operator Instructions) All right. At this time, I'm not showing any further questions on the phone line. So I would now like to turn the call back to Paolo Pallotti for any further remarks.

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Paolo Pallotti, Enel Chile S.A. - CEO [12]

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Okay. Thank you to everybody for attending this call and I leave the last message to Isabela.

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Isabela Klemes, Enel Chile S.A. - Head of IR [13]

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Okay. So thank you for your participation. Our team will be available for any kind of doubts that you might have. It was very nice to having you in this call today. Have a good day.

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Operator [14]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.