Outlook

Our projections contemplate downward pressures in long term energy prices from the upcoming energy auctions with distributors in Chile in 2017 and 2018, a factor that we have incorporated early on into our valuations. Our baseline scenario considers a long-term energy price in the US$45 to US$50/MWh range for regulated and unregulated clients. Furthermore, we estimate NCRE contracts will be awarded at even lower values.

We believe the introduction of potential payments for auxiliary services to the sector’s regulation would partially mitigate the impact on conventional power plants. Moreover, we estimate the expansion of Chile’s energy matrix will come almost entirely from NCRE sources, particularly wind and solar.

Another key development will be the interconnection between Chile’s two main grids, the Central SIC and Northern SING. We have assumed a marginal cost in the US$45 to US$50/MWh range in the long term for this newly proposed configuration.

The clear winner, based on a more favorable risk balance is Enel Americas, with positive effects from tariff increases in Argentina and Brazil. Additionally, we believe the company will most likely acquire new energy distribution assets in Brazil. Given this scenario and attractive EV/Ebitda 2018 ratios, Enel Americas is our top pick for the sector.

Risks

The main risk for the sector will come from downward pressures on long term energy prices. Furthermore, Colbun and Aes Gener have contracts expiring 2021-2024, representing a risk of overexposure to the spot market if no new contracts are awarded.

Early on in our valuation we included the risk of a new transformational event ahead for the sector: long-life battery-based energy storage systems, especially with declining development costs. This would significantly accelerate efficiency, development and implementation of wind and solar farms, displacing thermoelectric generation in the long term. Furthermore, we believe consumption per capita will increase following the pace of growth of new technologies, most notably the accelerated sale of Electric Vehicles and increasing implementation of IoT, which we estimate would lead to a scenario of higher consumption and lower margins. In this context, we believe the greatest value in the sector will lie in those generation and distribution companies that best adapt to these new developments.

Peers