Enel Chile S.A. Q1 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to Enel Chile's First Quarter 2024 Results Conference Call. My name is Victor and I will be your operator for today. During this conference call, we may make statements that constitute forward-looking statements within the meanings 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 quarter 2024 results. The presentation accompanying this conference call and Enel Chile's annual report on Form 20-F include under Risk Factors. You may access our first quarter 2024 results press release and presentation on our website www.enel.cl and our 20-F on the SEC's website, www.sec.gov. Readers are cautioned to not 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 these forward-looking statements becoming inaccurate, except as required by law. I will now turn the presentation over to Mrs. Isabela Klemes, Head of Investor Relations of Enel Chile. Please proceed.

Good morning and welcome to Enel Chile's 2024 first quarter results presentation. Thank you all for joining us today. My name is Isabela Klemes, and I lead the Investor Relations team. With me this morning is our CEO and CFO, Giuseppe Turchiarelli. As announced, on April 29, our shareholders' meeting appointed a new Board of Directors, and I would like to thank the former members for their contributions over the past year and extend our best wishes to the new members of our board. In the governance section on our website, you can find the new names, including those designated as the new Chairman of our Board and the Chairman of the Directors committee. Additionally, on the same date, the Board of Directors appointed Giuseppe Turchiarelli as our new CEO. Giuseppe will also serve as the interim CFO. Our presentation and related financial information are available on our website, www.enel.cl, in the Investors section and in our Ask Investors area. A replay of this call will soon be available as well. At the end of the presentation, there will be an opportunity to ask questions via phone or through the webcast chat. Giuseppe will now begin the presentation by sharing the key highlights of the period, discussing our portfolio management actions and regulatory updates, and finally providing an overview of our business's economic and financial performance. Thank you for your attention, and now I will hand the call over to Giuseppe.

Thank you, Isabela. Good morning, and thanks for joining us. Let's start the presentation with our main highlights on Slide 2. In this quarter, our hydro generation portfolio continues to perform remarkably, a result of the exceptional hydrological conditions last year, mainly due to the El Niño phenomenon in 2023 and a better melt season. This performance gives us a strong start to the year in terms of an efficient generation portfolio mix. Today, the CNE will publish the last month's regulated section spot price its own offering. Given this release, we will be able to confirm whether our offering was competitive. We will only know the winner's name in the coming days. Still on the regulatory side, we have some important news to share. First, the Chilean Congress approved the law related to the stabilization mechanism PEC 03, a very positive sign of stability in the energy market. Law 21 667 has already been published last April 30. Second, we continue to expect the new distribution tariff in 2024 to enter into force in the second half of the year. The distribution tariff review 2024-2028 process has already started, and we are expecting some updates in the field next month. We will give inputs on all topics later. In terms of our profitability, I'm pleased to announce that 2024 has started with solid results in terms of EBITDA and net income, which reflect our confidence in our guidance for this year. To conclude, the shareholders meeting approved the final dividend for 2023 of CLP 4.58 per share. Now in May, we will pay CLP 3.98 per share, complementing the amount already distributed as interim dividends in January of this year. Now let us move to Slide 3 to review how we executed our goals and strategy toward a more efficient generation portfolio mix. The favorable hydrological conditions during 2023, not seen since 2010, allowed us for a more comfortable weather availability until the end of the first quarter of 2024. This effect, associated with the favorable weather conditions during 2024, resulted in higher hydro generation of 0.9 terawatt hours. Net electricity generation totaled 6.1 terawatt hours as of March 2024, exceeding by 19% the production during the first quarter of 2023, primarily due to higher hydro renewable generation, resulting from the improved hydrological condition of new projects. This also offset the lower thermal dispatch, mostly related to the better hydro situation of the period. Our energy mix totaled 8.5 terawatt hours in March 2024, 0.8% higher than the level recorded in the first quarter of 2023, primarily due to higher sales to regulated customers. In terms of our balance, during this quarter, we increased our purchases from third parties by around 0.6 terawatt hours as part of our continued efforts to diversify our sourcing. As a result, our spot purchases have decreased by 0.9 terawatt hours. Almost 60% of this reduction was in the non-solar hours. A lot has been discussed regarding the operations at El Niño for 2024, so we continue to have a conservative hydro projection for 2024 of 9.6 terawatt hours. Even if we see a drier scenario for this year versus 2023, the big difference from the driest year in the past is that now we have plenty of gas volume to fulfill our needs, thanks to our long-term energy contracts with Shell. For reference, we have already achieved new firm agreements with several Argentinian gas suppliers for up to 2.6 million cubic meters per day from May to September 2024, and an additional 3.5 million cubic meters per day from October to December this year, giving us certainty to optimize our portfolio during 2024. Now let's move to the next slide to review our main KPIs on Slide 4. In terms of renewable investments to increase capacity in this first quarter, we reached 6.5 gigawatts of net capacity, representing a 77% stake in our generation portfolio. This enabled us to reach 76% CO2-free production, 11 basis points higher than in the first quarter of 2023. Regarding Enel X, an important complement to our integrated offerings that support the electrification of our clients, we have improved the performance of several KPIs compared to 2023. Regarding the distribution segment, the number of clients in distributive energy in our district continues to grow. For the KPI looking at the last 12 months, the indicators have remained in line with the same period of last year. Now on the next slide, let's look at some aspects relating to the regulatory context. As you may recall, last call, we indicated that in January this year, the Ministry of Energy presented a law related to the stabilization mechanism with the purpose of continuing the PEC and mitigating the projected increases to final customers. At the same time, we also aim to improve the client protection mechanism known as ABC, a mechanism for low gradual payment of community generators and establish a transitory subsidy for the most vulnerable clients. This new law was discussed and approved by the Chilean Congress in April and published to come into force last Tuesday, April 30. Now we are waiting for two important aspects. First, the publication of the sovereign guarantee decree needed to start the factoring process. This guarantee shall be presented to investors that will be part of the vision coordinated by the IDB, expected for next month. Second, the publication of the P&P decree expected by the end of June. With the publication of the document, the tariff for regulated clients will be active. We expect that the clients shall receive new tariffs at the beginning of the second half of 2024. As of March 2024, we had an account receivable effect already net of factoring of $849 million. With the publication of the sovereign decree and the PNP decree, we expect to execute the factoring of the current accounts receivable during the second half of this year, ranging from $450 million to $600 million. We expect that by the end of 2024, the accounts receivable net of factoring should range between $400 million and $500 million. On the distribution tariff, the regulatory final report for the 2020-2024 cycle was published in January-February, and then the tariff decree, and the same period, the remuneration shall be published within the next few months. Regarding the 2024-2028 cycle initiated in January 2024, we expect that the external consultant responsible for realizing the company studies has started work. A final report is foreseen to be published early in Q4 2024. We expect that by the end of this year, the regulator shall publish the preliminary report of this new cycle. Even though the new cycle shall not have a relevant change in terms of modeling, we will continue our work with leading the association to address changes in the regulatory model to match the needs we believe the distribution business requires to guarantee that the electrification and decarbonization plan acquired by the government and by society shall not be jeopardized by the lack of distribution infrastructure. Now let's review how our earnings indicators performed. Our economic and financial performance for this quarter is very solid. Here is a fixed summary of the main figures, which I will detail later. As you can see, this quarter EBITDA remains stable compared to the first quarter of 2023, even though in the first quarter of 2023 we had an important contribution from gas trading activity. Our generation portfolio mix in the quarter explains largely these solid results. The net income improved by 6% compared to the same period last year, reaching $157 million for this quarter. This was mainly due to the recognition of PEC 2 interest, which positively impacted the financial results. Net FFO also showed an improvement of 34% in the period, which reached $114 million in this quarter. The improvement too has been impacted by the challenges that we will see more details on in the following slides. Now on the next slide, let's review the progress on CapEx. Our total CapEx reached $179 million in the first quarter, which is 65% higher than the figures from the first quarter of last year. I would like to mention that 67% of our total CapEx, totaling $120 million, was related to renewables and storage, and 22%, or $40 million, was related to grid improvements, mainly due to new customer commissions as a result of the growth of our customer base. Regarding asset management CapEx, which represents 30% or $54 million of our total CapEx, it increased by around 50% compared to last year's figures, mainly explained by increased maintenance activity in conventional generation and distribution business. Finally, development CapEx reached $103 million, representing 58% of our total CapEx, an increase of 77% compared to last year's figures, considering our renewable portfolio and cost structure and activity at some of our hydrological plants to improve their efficiency. Let's now take a look at the next slide where we will review a summary of this first quarter's EBITDA. In the first quarter of 2024, our EBITDA reached $293 million, in line with the last three-year figures. Let me explain the main effects of this cost. First, I'd like to highlight the positive contribution from PPA sales, increasing to $53 million, primarily due to higher volume mainly in regulated markets and indexation in the free market. Second, a positive effect of $40 million from industrial sourcing, mainly explained by lower variable costs, considering a better regulatory scenario and a more efficient generation mix that enabled us to reduce our fuel consumption. Third, the positive contribution of $47 million related to commercial sourcing, primarily due to lower purchases in the stock market in terms of lower volumes and lower prices, partially offset by higher volume costs from third parties. In addition, we had a positive effect of $4 million related to the grid margin. This variation is mainly explained by the greater remuneration, which is associated with the VAD 2020-2024 regulatory report publication. The aforementioned effects were partially offset by first, a negative effect of $118 million related to the gas trading activities carried out during the first quarter of 2023; second, we had a negative effect of $25 million related to the Metka PPA agreement signed in 2023. Let's move on to the next slide where we will review the net income evolution accounting for $157 million. Our net income increased by 6% versus last year's figures, let me emphasize the El Niño effect. EBITDA is in line with the last figure as already explained, higher depreciation and amortization of $13 million, mainly resulting from higher depreciation in power due to our new renewable projects in operation and in Chilean peso devaluation in the period, which was partially offset by the change in the consolidation perimeter. This was partially offset by lower bad debt accrued due to a reduction in the commission debt level as a result of the commercial agreement and capping programs executed in the period. Regarding financial results and investment, we recorded a $19 million improvement primarily explained by $21 million related to higher interest and adjustment due to the PEC 2 recognition. Income taxes decreased by $2 million, mainly due to penalties provisions reversion from a preliminary period. Moving to FFO analysis on the next slide. When reviewing our FFO for this period, our FFO reached $114 million, representing an improvement of $29 million compared to the same period in 2023. The $293 million coming from EBITDA, mainly thanks to our PPA sales and the positive performance of the industrial and commercial sourcing as explained previously. A negative effect came from the cumulative stabilization mechanism effect in our receivable, totaling $105 million this quarter. This negative effect is being partially offset by the execution of the IDB capital related to PEC 2, which amounted to $15 million this quarter. The result and negative effect coming from working capital that reached $29 million, continuing payment from 2023. In addition, income tax this quarter negatively impacted our FFO by $26 million, mainly explained by tax savings in the generation business in 2024. To conclude, in terms of financial expenses, we paid $34 million in debt interest. When comparing the FFO between the first quarter of 2024 and the first quarter of 2023, we can see how the figures are very much in line. The only main difference is related to the net impact of the PEC accumulation, as you can see in this slide. Now let's take a look at our liquidity and leverage position. Our gross debt decreased around 1% to $4.4 billion by the end of March 2024 compared to December 2023. We foresee that our net debt will continue to decrease in the second half of 2024, considering the execution of net working capital expected for the period. Therefore, the investment level is a temporary condition that will be recovered by the end of the year. The average of our debt maturity decreased temporarily to 5.7 years as of March 2024, from 6.1 years as of December 2023. The portion at the fixed rate is maintained at 58% of the total debt, in line with December 2023. The average cost of our debt reached 4.83% as of March 2024, in line with December 2023. In terms of liquidity, we had a comfortable position to support upcoming investments we see in 2024 and cope with possible headwinds in the debt market related to the economic situation. As of March 31, 2024, we had signed two new credit lines with third parties, totaling $150 million and a fee of $750 million. In terms of maturity for 2024, we have approximately $770 million due during 2024, including $400 million of the Yankee bond, which was successfully paid in April. The payment was realized using short-term intercompany investments between Enel Finance and Enel Chile, utilizing part of the revolving committed credit lines available for NLG. Now I will close the presentation with some closing remarks. We had a strong start to the year in terms of operating performance, mainly in the generation business. The better-than-expected hydrology in 2023 reflected in better reservoir levels at the beginning of this year. The pace of demand seen in our generation needs also supported our solid results. Sound liquidity put us in a comfortable position to support our short-term strategy and cover the maturity over the plain period as part of our derisking and deleveraging strategy announced in our last Capital Market Day. Finally, next month will be very important in terms of regulatory updates for the sector as the release of the sovereign currency decree that will support the start of the factory and the debt recovery, as well as the publication of the 2020-2024 tariff decree of the distribution business. Let me now hand over to Isabela.

Thank you for your attention. Now let's begin with the Q&A section. We will receive questions via phone and chat in the webcast. The Q&A section is open. Operator, please, you may start.

Our first question comes from Javier Suarez from Mediobanca.

Congratulations to Giuseppe for the appointment of new CEO. Two or three questions. The first one is on the impact that the approval of the new stabilization mechanism may have on the working capital improvement during 2024 and the following years, particularly in the 2024-2026 period, which could positively impact cash flow generation. The second point is also on your latest expectations from the approval of the 2020 to 2024 electricity distribution tariff. The tariffs are expected to decrease in the third quarter, but if you could share with us your latest expectations on what you see or quantify as possible upside from this new regulation? And the third comment is if you could share with us your latest expectation for the Company's debt by year-end? Lastly, on your comment that you are comfortable with the current guidance for 2024, shouldn't we view the current target as conservative considering that hydro production is likely to exceed your assumptions in the current business plan, especially with the new stabilization mechanism allowing for the collection of pending regulatory receivables?

Giuseppe?

Thank you for your congratulations. Regarding the price stabilization mechanism, as I said previously, the law has been approved and published. Now we are waiting for several next steps. The first important fact we are waiting for is the issuance of the sovereign decree that will give us the guarantee for covering 30% of our credit necessary to proceed with the factoring. The second set is the indication in the decree due at the end of June, which will help us define the exact amount of factoring that is supposed to be done in the second half. Now, second half means between the end of the third quarter and beginning of the fourth quarter. We estimate this could be between $450 million and $600 million. If we are able to proceed with this factoring, we expect to close the year with accounts receivable of between $400 million and $500 million. Consider that most of this amount will be recovered between 2025 and 2026, with a small portion related to PEC 1 that will be recovered in 2027 according to the law. So this concerns the first question. Regarding the impact of VAD 2020-2024, we have already included this in our profit and loss, estimating around $20 million compared to our previous assumptions. For the end of the year, we're supposed to close with a net debt of around $3.6 million. Let me clarify that this amount is also based on the possibility of performing the factoring mentioned before. If everything goes well, we expect to close the year with $3.6 million in net debt and a net-debt-to-EBITDA ratio lower than 3x, as per our guidance and targets set at the cluster time. Regarding guidance, yes, based on the results of the first quarter, we clearly expect a better guidance. However, we prefer to remain conservative in confirming the guidance presented at the capital market. Clearly, there could be some possible upside, but we want to be cautious until we have better clarity. We should provide a more updated guidance as we close the second half, considering the new season that typically starts at the end of April, beginning of May.

Just to be 100% clear on your first answer about regulatory receivables by year-end. You mentioned that this should amount to approximately $400 million, with a reduction over the year between $400 million and $600 million. Is this correct?

Yes, between $400 million and $500 million will be the year-end credit receivables, depending on how much we're able to execute in terms of factoring. Again, I will repeat, the factoring we expect to perform should range from $450 million to $600 million.

As we do not see any other questions from the line, let's go to the chat. Okay. The first question for me from Fernando Gonzalez from BTG. Fernando is saying, Giuseppe, congratulations on your appointment. Can we assume continuity from a strategic point of view, or is there something different you would like to focus on? What are the things you will dedicate more time to that concern you most in the company?

Thank you, Fernando, for your congratulations. Generally, I can tell you that there will be no change in terms of strategy. We will stick to the strategy presented last year at our Capital Markets Day. The topics and focus of the company remain the same: increasing our capacity in terms of renewables, with a special focus on financial stability as a pillar in our strategy. So, I do not foresee any change so far.

Okay. So let's proceed to the second question. Could you elaborate more on the $25 million negative impact on EBITDA from the Metka PPA agreement?

Yes. Last year, in the first quarter of 2023, we reached an agreement with our energy supplier. We had a PPA with this company, Metka. The PPA was based on a specific delivery point. For several reasons, we negotiated with this company to update the contract, which came with a $25 million negative impact in 2023. It was a one-off effect that clearly is not going to be repeated, due to very specific negotiations with our supplier.

Okay. And the final question for the night. What are your thoughts on the regulatory changes being discussed regarding the export market? Is it a change you agree with?

Well, we are still evaluating the points. The impact on pricing in the export market is a very extensive topic, so we are trying to figure out the best way possible for any potential changes. As stated at the beginning of the call, we will provide more updates in the following calls.

Thank you, Giuseppe. Now we have a question also in chat from Florencia Mayorga from MetLife. Florencia is asking if you could repeat again the outstanding amount regarding PEC that we are expecting by the end of 2024, and if we have any updates about the prices from the recent regulated adoption.

In terms of accounts receivable coming from the PEC, we are assuming to factor between $450 million to $600 million in the second half of this year. This factoring will help us close the credit receivables at the end of 2024 in a range of between $400 million and $500 million. As for the regulatory tender, we are currently waiting for the cap price release mentioned earlier, and expect to have more information shortly that will aid us in determining whether we won the tender or not.

Okay. Another question is coming from Ignacio Galvez from Santander. Financial costs during the fourth quarter of 2023 and the first quarter of 2024 contained some costs related to electrical accounts receivables. Are these nonrecurring costs already over, or should we expect additional costs in the forthcoming quarters?

Basically, in addressing the effects related to the transactions we had, we sold the asset to a third party, and we do not anticipate any additional effect in the following months. It is just an account impact, not a financial one. The business of Enel and the electric bus arrangements will not have similar effects once you sell the business.

Okay. Then let's go to the final question, the last one from Tomas Gonzalez from Scotiabank. Giuseppe, Isabela, congratulations on your appointment to CEO. Well-deserved recognition. The question from Tomas is: can you provide an update regarding the potential sale of up to 49% of renewable assets, and could this lead to a higher dividend in the future?

Thank you, Tomas. We are moving ahead with the operational phase regarding the minority stake of our assets. We do not have any updates for you today, but in the following months, around June, I hope to provide more detailed information. In regards to additional dividends, it is too early to discuss how this process will unfold and what prices will materialize.

Okay. Thank you, Giuseppe. With this, we conclude our conference call. The investor relations team is available for any doubts you may have. Many thanks for your attention, and have a great end of the week.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.