Earnings Call Transcript - ENIC Q4 2021

Operator, Operator

Good day, ladies and gentlemen. And welcome to Enel Chile Q4 and full-year 2021 Results Conference Call. My name is Gigi, and I will be your operator for today. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero 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 Q4 and full-year 2021 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 Q4 and full-year 2021 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 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 will now like to turn the presentation over to Mrs. Isabela Klemes, Head of Investor Relations of Enel Chile. Please proceed.

Isabela Klemes, Head of Investor Relations

Good afternoon, and welcome to Enel Chile, Fourth Quarter and full-year 2021 results presentation. Thank you all for joining us today. I am Isabela Klemes, the Head of Investor Relations. Let me remind you that our presentation and related financial information are available on our website www.enel.cl in the Investor section any hour after investors. After the presentation, there will be an opportunity for questions via phone or webcast chat through the link 'ask a question.' Joining me this afternoon are our CEO, Paolo Pallotti, and our CFO, Giuseppe Turchiarelli. In the following slides, Paolo will bring you the presentation with the main highlights of the call, including our company performance, strategic updates, and financial results. A replay of the call will be available, and as always, our IR team will continue to be available to provide you with detailed information regarding the figures in this presentation. Let me remind you that media participants are connected only in listening mode. Thank you all for your attention, and now let me hand over to Paolo.

Paolo Pallotti, CEO

Thank you, Isabela. Good morning, and I'll say good afternoon to everyone, and thank you for joining us. As we have already commented during our previous calls, the Chilean electricity system has been affected by several temporary phenomena that put pressure on each dynamic and stability. In terms of hydrology, the country is facing one of the driest periods in its history. Yearly flow levels of 2021 were the lowest recorded, while basin levels continue to be higher. This has detrimental consequences impacting several correlated sectors, including electricity generation and others. Additionally, demand for commodities surged, and the lack of availability of Argentinian natural gas faced almost all of the first nine months of 2021. The combination of these effects, along with structural delays in renewable projects, constrained our 2021 margins and cash flow generation capability. This was further complicated by the low levels of basic service law and price stabilization mechanisms. We have previously mentioned several actions taken since the beginning of 2021 to improve gas availability. We began buying additional LNG cargos to supply our plants and subsequently sell gas to the system, becoming the largest LNG gas importer in the country this year. In this challenging scenario, with tough conditions posed by the pandemic's duration, we advanced with our renewable projects, increasing our renewable capacity by 900 megawatts over the period. More projects are in the pipeline, which I will share more about later. We have started linking the issuance of new credit lines to sustainability targets. Currently, 21% of our total debt is linked to these targets, and we aim to increase this to 52% by 2024. Regarding awards, we are pleased to announce that we have been included in the Bloomberg Gender Equality Index for the first time. We also applied for the first time to the CDP climate change program, obtaining a B score. This confirms that we are making coordinated and consistent actions on climate change. Now, let's advance to Slide 4 to provide an update about the market. In 2021, the system had less water availability compared to 2020, with hydrology slightly better than the driest years recorded in 1998 and 1999. The effects of melting seasons were poor due to low levels during winter. In the second half of the year, there were some limited positive effects from the preventive rationing decree and an agreement reached with several communities. With the lack of Argentinian gas, many players were forced to rely on spot market purchases to support their generation needs. The overall significant increase in commodity prices resulted from the international market situation, with gas prices more than tripling in the fourth quarter of 2020 to the second half of 2021. Additionally, delays within renewable projects at the country level, resulting from restrictions, have impacted the system notably. These factors led to a substantial increase in margin costs, particularly during the third quarter of 2021 and following the preventive rationing decree. The situation greatly improved during the fourth quarter last year, primarily due to the rehabilitation of Argentinian gas supply in the Chilean market, which provided a stable supply until the end of the year. The market data shows a 5% increase in overall power demand compared to 2020, and we expect this growth to continue into 2022. Let us now review the current framework of the energy sector. Moving to Slide five, the expert panel has published discrepancy reports related to the regulatory period of 2020 to 2022. This process is nearly complete, and we don't expect negative effects on the estimated tariff levels already predicted. The distribution tariffs review process is still ongoing without material advances in the past month, and we expect a final distribution tariff confirmation by late 2022 or early 2023. Recently, Congress approved a significant review of the basic service law, addressing the handling of debts incurred by residential clients and companies between March 2020 and December 2021. The electricity consumption threshold of 250 kilowatt-hours per month has been established to determine the clients affected. Customers consuming less than this amount can schedule their payments over 48 installments, where the government will subsidize portions. On the contrary, customers above this threshold are subject to existing rules and might face disconnection for non-payment. As of December 31, 2021, our total outstanding debt was $210 million, with $140 million related to residential clients, being $32 million below the 250 kilowatt-hour threshold. Regarding the energy stabilization mechanism, the fund is projected to reach its legal limit of $1,350 million by June 2022. As of December 2021, Enel Chile's net accounts amounted to $283 million. Turning now to our decarbonization process on Slide Number 6, in 2021, we successfully connected 900 megawatts of renewable projects, over 90% of which are solar. This milestone brings our total connected capacity to 8 gigawatts, with 70% being renewable capacity. This connected capacity is expected to reach full production within the next month, pending final testing. Let’s proceed to Slide 7. In addition to the recently connected projects, we are advancing on more than 1.4 gigawatts of additional projects, which include both ongoing constructions from last year and new projects we have announced, like wind facilities slated to commence construction shortly. Our Campos del Sol II and other solar plants are already under construction. Regarding our green hydrogen efforts, we recently received delivery of new water electrolyzers destined for production in Chile, with operations expected to start this year. This will mark an important milestone for developing green hydrogen in the region. Moving to Slide 8, we are advancing the digitalization of our commercial channels. In 2021, over 90% of our client interactions occurred digitally. Despite the challenges posed by the pandemic, we have managed to enhance customer care through the introduction of improved digital interfaces. On the network side, our quality indicators continue to improve, thanks to increased automation levels in our low voltage networks, where smart meters play a crucial role in striving to reduce outage figures while improving overall service points. Loss levels have stabilized, and we may see reductions in 2022. To conclude, improvements in energy distribution during 2021 reflect the easing health restrictions and overall economic recovery, showing a 5% increase compared to 2020 and returning to pre-pandemic levels. Now let’s focus on the financial context, moving to Page Number 9.

Giuseppe Turchiarelli, CFO

Thank you, Paolo. Let me start with a brief overview of our financial highlights on the next slides. Full-year 2021 adjusted EBITDA reached $0.8 billion, which is a 3% decrease compared to last year. Q4 adjusted EBITDA reached $258 million, in line with our 2021 performance guidelines. Now, I will provide a summary of some key financial achievements. Moving to Slide 12, 2021 capex reached $1.1 billion, with 3% allocated to achieve our SDG goals, primarily focused on developing new renewable projects. Customer capex totaled $80 million, aimed mainly at new connections and enhancing our distribution and commercial systems. The capex for the network reached $116 million, driven largely by our renewable expansion initiatives. Overall, while some projects are experiencing increased costs due to commodity prices and inflation, we remain aligned with our budgetary targets. Now let’s examine our Q4 adjusted EBITDA breakdown on Slide 14, which shows a $253 million reduction compared to Q4 2020 figures. The positive variation of $83 million largely resulted from higher Power Purchase Agreement (PPA) sales, particularly in the last quarter of 2021. However, we faced challenges from higher thermal generation costs due to adverse hydrological conditions, contributing negatively to approximately $88 million. The increase in commodity prices also impacted our unit generation costs negatively, while network remuneration accounted for a positive impact concerning recovering demand during Q4 2021. Other effects mostly stemmed from the energy stabilization mechanism. Moving to Slide 16 for a summary of our financial overview, our adjusted net income for the year reached $0.2 billion, in line with our annual guidance while payments in the last quarter amounted to $96 million. Overall, we are aware that our debt remains sustainable, which we will continue to manage carefully. I will now conclude and hand over to Paolo for his closing remarks.

Paolo Pallotti, CEO

Thank you, Giuseppe. The progress in our renewable projects contributes positively to our generation portfolio's competitiveness and resilience, aligning with our long-term decarbonization goals. We are dedicated to supporting our clients' electrification needs and advancing our strategy under the highest sustainability standards. Our recent inclusion in global sustainability indices further reflects our commitment to climate action. As I prepare to conclude, I want to mention that I will be departing from Enel Chile to assume another position within the Enel Group. I would like to thank all my colleagues and the management team for their collaboration and support. I hope that normalcy can soon return as we navigate ongoing circumstances, including the current situation in Ukraine. Tomorrow, Fabrizio Barderi will step into the role of the new CEO of Enel Chile, and I wish him great success going forward. Now let's open the Q&A section.

Isabela Klemes, Head of Investor Relations

Thank you, Paolo. As anticipated, we will receive questions via phone and checks in the webcast. Operator, please begin the Q&A session.

Operator, Operator

Our first question comes from Enrico Bartoli from Stifel. Your line is now open.

Enrico Bartoli, Analyst

Good evening, and thank you for taking my questions. I have three: the first is regarding Slide 23 of the presentation concerning the evolution of EBITDA in the macro business for distribution and transmission. Can you provide guidance on the relative movements for these two components, considering that distribution fell in 2021, while recovery is expected in Q4? Also, how do you envision these two businesses moving into 2022? The second question concerns an update on hydrology outlook for early 2022 and any guidance on EBITDA for the entire year. Lastly, can you provide insight into what types of assets you consider for transfer in your asset rotation transactions?

Paolo Pallotti, CEO

Thank you, Enrico, for your questions. Let me address the last two inquiries and leave the first one to Giuseppe. Regarding hydrology, I would emphasize that while resources have indeed been limited, the overall situation maintains alignment with our latest expectations. We anticipate some recovery in resource availability, though conditions remain fragile. Initially, our outlook for 2022 is to see continued collaboration with energy supplies, especially Argentinian gas. As for asset rotation, we are actively evaluating non-core assets to improve our debt position, and we are on track with our targets. Regarding distribution, one key ongoing discussion involves stabilization in tariff structures. Now, let me pass it to Giuseppe.

Giuseppe Turchiarelli, CFO

In terms of EBITDA, we can highlight a significant impact due to the sales mix. Our new agreements in place for 2021 account for approximately $110 million, while adjustments related to indexation and hydrology present the other side of the coin. The net worth remuneration from the distribution business aligns positively for Q4 2021. Our position and projections for EBITDA remain steady, confirming the guidance provided earlier without expected discrepancies moving forward.

Enrico Bartoli, Analyst

Thank you very much for your detailed explanations. Following up regarding hydrology and its impact on EBITDA guidance for 2022, could you confirm whether the targets remain in line with initial forecasts?

Paolo Pallotti, CEO

Certainly, regarding our forecasts, the efficiency of production remains aligned. Don’t forget that with the first quarter presenting potential deviations, we are still optimistic about meeting our guidance based on historical performance and newly verified resource levels.

Operator, Operator

Thank you. As a reminder, to ask a question, please press star one. Our next question comes from Sara Piccinini from Mediobanca. Your line is now open.

Sara Piccinini, Analyst

Hi, thank you for taking my questions and congratulations on your opportunities. My first is regarding renewables: can you clarify your secured capacity levels for the coming year, and what CAPEX investments you have contracted? Will these investments be affected by rising commodity prices, or are you comfortable with the current projections? Also, can you explain the working capital level with regard to factoring, and how the stabilization mechanism works? What can we expect for 2022? Lastly, concerning tariffs for the distribution and transmission businesses, can we expect confirmation on regulatory reviews soon?

Paolo Pallotti, CEO

Thank you, Sara. Many questions here. I'll start by stating that we are on track with capacity expansions, though external price pressures remain a consideration. Regarding working capital, factoring will indeed play a more significant part in our planning moving forward while we strive to enhance operational efficiencies. Lastly, regarding tariff regulations: while the transmission sector is nearing conclusion without significant changes anticipated, much remains to be resolved in the distribution sector. This process is complex due to ongoing consultations.

Giuseppe Turchiarelli, CFO

In terms of working capital, 2021 was significant in factoring for both generation and distribution, yielding over $300 million. For 2022, we expect these figures to stabilize, contingent upon the recovery and macroeconomic situation. Our focus remains on optimizing our asset management strategies while monitoring external factors closely.

Andrew McCarthy, Analyst

Good afternoon. Thank you for the informative presentation. My first question relates to the tariff stabilization mechanism: what are your thoughts regarding options after June, as we approach the limit of the $1.35 billion fund? And regarding the retirement of Bocamina 2, what is your stance on reported delays? Lastly, how are you feeling about the 2022 EBITDA target from your strategic plan presentation?

Paolo Pallotti, CEO

Thank you, Andrew. For the price stabilization mechanisms, we face uncertainties, and proactive engagement will be crucial in the months ahead; though vice-principal discussions remain ongoing, we must establish comprehensive strategies for any anticipated outcomes. The upcoming transition following Bocamina 2's scheduled retirement coincides with significant planning ongoing and must be navigated judiciously. Regarding our EBITDA targets, as already confirmed by Giuseppe, we remain confident in our set projections and strategic adjustments.

Isabela Klemes, Head of Investor Relations

Thank you, Paolo. We have just received two additional questions via chat. The first is from Rosales from BTG, asking about the leverage situation should hydrology affect performance for the remaining year and further, how stable this is in future years given high prices. The other is from Carlos inquiring how ration growth shares would impact our structure. Please address those.

Paolo Pallotti, CEO

Addressing the first query, hydrological variances are difficult to predict accurately; comparable precedents suggest fluctuations could recenter after active winter periods. Nonetheless, I am optimistic that the advent of Argentinian gas supply will positively support us going forward. For identifying potential ration growth impacts, it's imperative to constantly assess commodity dynamics that influence our operational leverage given the complexities arising from European market instabilities. Thankfully, we have robust contracts securing stability.

Isabela Klemes, Head of Investor Relations

Thank you, Paolo. Since there are no further questions, I'll conclude our results conference call. Our Investor Relations team is available for any further inquiries. Thank you all for your participation today.

Paolo Pallotti, CEO

Thank you and goodbye.

Giuseppe Turchiarelli, CFO

Goodbye.