EUR 850.00 For Business Accounts Only

Morningstar | Enel Americas Posts Solid 2018 Results; Capital Increase Again Raises Stewardship Concern

We are reaffirming our $10 per ADR fair value estimate after Enel Americas reported solid 2018 results but announced a $3.5 billion capital increase expected to be completed before year-end. Earnings in 2018 were $1.05 per ADR versus our estimate of $0.64 per ADR.

The capital increase, a roughly 30% increase in common equity, was not received well by the market, and the shares were still off over 15% several trading days after the announcement. Enel Americas plans to use up to $2.65 billion of the proceeds to redeem debt used for the June 2018 acquisition of Eletropaulo (now called Enel Distribuicao Sao Paulo), and up to $850 million for restructuring the pension plan and reduction of other contingencies for the Brazilian utility.

We had expected Enel Americas to restructure the bridge loan used for the acquisition, carrying 9% interest rates, but the pension plan and other contingencies were a negative surprise. However, the additional equity significantly strengthens Enel Americas’ balance sheet, weakened by the acquisition. During the Preemptive Rights Period, expected to begin in June, existing shareholders can subscribe to a number of shares proportional to their current ownership. The pricing of the new shares will be at a 5% discount to the five-day average prior to the PRP.

We consider it a positive for minority shareholders that Enel Americas’ largest shareholder would only be allowed to contribute cash for its new shares. At the last capital increase in 2013, Enel S.p.A., an Italian energy holding company that currently owns 51.8% of Enel Americas, proposed, with approval of Enel Americas management and board, contributing assets in lieu of cash for its new shares.

Enel S.p.A. remains in control of Enel Americas through its share ownership and a revolving door of senior management with replacements who usually have strong ties to Enel S.p.A. This remains a material concern and is the primary reason for our Poor stewardship rating.

During the Q&A of the conference call, Enel Americas' management was very firm that only cash would be allowed this time. During the previous capital raising, pension fund managers, owners of about 14% of the company at that time, and regulators brought discipline to the process, hiring financial consultants, and through negotiation reduced the amount paid for the assets by $1.2 billion, approximately 25%.

Earnings were boosted in the recently ended quarter by a one-time tax benefit of $347 million, approximately $0.30 per ADR, at Enel Distribucion Goias, a Brazilian distribution utility acquired in 2017. Even without the tax benefit, results were stronger than the $0.62 per ADR posted in 2017 and our estimate. The results were especially positive in light of the macro conditions in Brazil and hyperinflationary economy in Argentina.