Earnings Call Transcript - ENIC Q4 2022

Operator, Operator

Good morning, ladies and gentlemen, and welcome to Enel Chile Fourth Quarter and Full Year 2022 Results Conference Call. My name is Gigi, and I'll be your operator for today. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being 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 fourth quarter and full year 2022 results. The presentation accompanying this conference call and Enel Chile's annual report on Form 20-F, included under Risk Factors. You may access our fourth quarter and full year 2022 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 these forward-looking statements, which speak only as of their dates. And 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 would 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 morning, and welcome to Enel Chile's Fourth Quarter and Full Year 2022 Results Presentation. Thanks to you all for joining us today. Joining me this morning are our CEO, Fabrizio Barderi; and our CFO, Giuseppe Turchiarelli. Our presentation and related financial information are available on our website, www.enel.cl in the Investors section and in our app for investors. In addition, a replay of the call will be available soon. At the end of this presentation, there will be an opportunity to ask questions via phone or webcast chat through the link 'ask a question.' Media participants are only connected in listener mode. The following slides, Fabrizio will open the presentation with our key highlights and later pass it to Giuseppe for our business economic and financial performance. Thank you all for your attention. And now let me hand over to Fabrizio.

Fabrizio Barderi, CEO

Thank you, Isabela. Good morning, and thanks for joining us. Let me now start with the highlights of the period on Slide 3. 2022 was a very complex year, but it also was a year in which we had the opportunity to take several actions necessary to recover our company's financial position faster than expected. Today, I will provide an in-depth look at how Enel Chile is in a better shape to continue addressing the challenges and taking advantage of the opportunities ahead. We are very pleased to announce that 2022 was a turning point in our story, mainly through the asset rotation activities such as the sale of our transmission assets and portfolio management through the renegotiation of our LNG contracts. We significantly exceeded the net income target for 2022 announced at the 2021 Investor Day. Moreover, we have exceeded the net income projection presented in November during our last Investor Day. These results were achieved despite a challenging market context. Spot prices were and continue to be under pressure given the commodity scenario and bottlenecks in the national transmission systems. Nevertheless, improved hydrology and various optimization initiatives allowed us to offset this situation. Hydrogeneration increased by 2 terawatt hours compared to 2021. Regarding our decarbonization path, we added around 0.8 gigawatts of additional renewable capacity to our portfolio during the year. Also, in December 2022, we started the commercial operation of our free nitrogen pilot project in Southern Chile. As a result of all our actions and strategy, we have continued to be recognized as one of the region's best ESG performers. In fact, we became the first country's electricity generation company in Chile after the disconnection of unit 2 at Bocamina power plant last September. Another significant milestone was the Company's rapid deleveraging, reducing its net debt-to-EBITDA ratio by around 60%. As a result, we improved our liquidity to support our strategy for the 2023 to 2025 period. In April 2023, we will hold the Annual Shareholders' General Meeting where we will propose a final dividend of CLN 5.1 per share, totaling CLN 5.2 per share for the 2022 fiscal year. Now let us move to Slide 4 to review our main KPIs of 2022 versus our guidance. Even though 2022 was a complex and challenging year for the energy sector, we faced headwinds and positioned ourselves in a much more comfortable situation, thanks to several optimization actions which we will discuss in more detail in the following slides. First, we added 0.8 gigawatts of renewable capacity, reaching 76% of our total generation market by the end of last year. Therefore, we accomplished our renewables percentage in our portfolio KPI and reaffirmed our commitment to the energy transition. In addition, the better business performance, combined with the conclusion of several initiatives during 2022, enabled us to increase our EBITDA and net income. Notably, in both indicators, we exceeded the upper range of our guidance announced during the 2021 Investor Day, allowing for a significant recovery in the Company's financial situation, as we forecasted in November. The net income figure for 2022 was even higher than the last projection we shared in November. In the following slides, we will provide more details about our initiatives and how they translated into this performance improvement. On Slide 6, we will briefly talk about the market situation and how we have developed our recovery plan. Last year, we executed a recovery plan by implementing several actions to address the challenging scenario that pressured the entire energy sector, including increasing commodity prices, transmission constraints, and critical hydrology conditions at the beginning of the year. Our short-term optimization initiatives contributed $276 million to our results, as detailed in the slide. The hydrology recovery during 2022 and an effective gas strategy has boosted our portfolio results, contributing almost $190 million in 2022. We connected 0.8 gigawatts of new renewable installed capacity, contributing an additional generation impact of $37 million. We continue to promote and support the energy transition in Chile, strengthening our portfolio mix and asset diversity. During the last few years, we have significantly increased our renewable capacity through a diversified pipeline, allowing us to consolidate our position.

Giuseppe Turchiarelli, CFO

Many thanks, Fabrizio. Good morning to all our investors connected. I will start my presentation on Slide 12, where I show a summary of our main results and the adjustments of the period. For the full year 2022, the EBITDA is adjusted by the impairment made to the full stock of the period, which amounted to $59 million related to the generation development process, as geothermal, hydropower plants, and thermal facility projects that we decided not to execute according to our strategy. The last quarter of 2022 also came with adjustments, but the record booked during the period was $61 million. All these 2022 adjustments affected the bottom line by $80 million for the full year and $39 million in the quarter. As you can see in the slide, all earnings indicators represented significant improvements versus the 2021 keys. Before moving on, I would like to reinforce the results of our efforts to reduce our leverage. Our net debt to EBITDA has decreased by 60% as of December 31, 2022, compared to the same period of the previous year. This was primarily driven by the managerial actions already mentioned by Fabrizio, alongside the Shell agreement and the sale of electrical assets executed in 2022.

Fabrizio Barderi, CEO

Many thanks, Giuseppe. Now I will point out some closing remarks on Slide 20. Despite the very challenging environment during 2022, we have been able to deliver a more than solid operating and financial performance. This is represented by our earnings, along with our unlocking value actions that represented a turnaround story for our assets. These outstanding results led to an important improvement in our financial position, giving us room to continue pursuing our strategy towards decarbonization, electrification, and value creation forward as we presented at our last Investor Day.

Isabela Klemes, Head of Investor Relations

Thank you, Fabrizio. Thank you, Giuseppe. Thank you all for your attention. As I have anticipated, we will receive questions via phone and chat in the webcast. The Q&A session is now open. Gigi, please you may start.

Javier Suarez, Analyst

Many thanks for the presentation and for taking my questions. I have three. The first one is on Slide 18 and the impact of the stabilization mechanism, which has played an important role in 2022. My question is, what is your expectation for that stabilization mechanism impacting cash flow generation in the next year, especially in 2023 and '24? The second question is regarding expenditures related to the regulatory framework evolution, particularly concerning your expectation from capacity regulation on payments. I believe you mentioned that the new regulation should be published during the second half of 2023. Could you help us understand the implications of this new regulation for Enel Chile? The final question is on the balance sheet structure of the Company. There has been significant improvement in the net debt-to-EBITDA following the extraordinary operations. I expect net debt to EBITDA to be around 2.7x. What do you consider an optimal net debt to EBITDA for a company like Enel Chile? Are you planning to continue with asset rotation and portfolio management through 2023 and 2024? Lastly, could you share your cost of debt expectations for 2022, 2023, and '24?

Fabrizio Barderi, CEO

Let me address the second question and then hand over to Giuseppe for the first and third questions. I believe the optimal net debt-to-EBITDA that I've heard is around 3, but Giuseppe will provide further details. Regarding capacity payment, this is still under discussion, and there are available documents for different stakeholders for their comments. We know quite well the current state of the proposal. I don't foresee any particular impact in the short term for two reasons: the first is that this has to be approved, and the second is the transition period where the old and new regulations will run in parallel. We don't expect a significant impact on our portfolio.

Giuseppe Turchiarelli, CFO

For your question regarding the recovery of receivables due to the new law, we expect to receive most amounts by the end of 2023, around $450 million, assuming the regulatory procedures are issued to start the collection process. If everything goes according to plan, we could start recovering part of this amount around $150 million by the end of the year. For leverage targets, achieving below 3x net debt to EBITDA complies with our raising guidance requirements. We believe this ratio will be achieved by the end of this year. Regarding cost of debt in 2023, we expect a slight increase due to repayment of short-term debt, which is currently cheaper, estimating to close at below 5%, around 4.5%.

Fabrizio Barderi, CEO

Let me address the third question regarding the distribution segment. The increase in electrical cable theft is a concern tied to a broader issue of security in Chile. We are working with the government to introduce stricter regulations to help contain these thefts, which have undoubtedly increased. About future renewable capacity, it's tough to predict a structural overcapacity in the system soon, as there are transmission constraints that our management is working on. In general, we continue to manage our portfolio in terms of selling energy strategically to help minimize any potential overcapacity growth. I do not anticipate any drastic changes in the short to medium term regarding our portfolio management.

Isabela Klemes, Head of Investor Relations

Thank you for your questions. We have received comments from the chat as well. Fabrizio, could you explain more about the gas optimization gains recorded in the fourth quarter and the full year of 2022? Also, what actions are we taking as a company to improve distribution business performance?

Fabrizio Barderi, CEO

Gas optimization, for us, is pivotal and relevant for 2022 and will continue to be so in 2023. The most impactful activities have been driven by the sale of LNG in international markets. We sold three LNG cargoes in the last year, with very high market prices, benefiting our results considerably. In 2023, we already sold four additional cargoes in international markets that also produced interesting margins. We are continually seeking to optimize our gas portfolio to extract the maximum value. As for distribution, our focus is on improving regulatory compliance to enable potential future opportunities arising from electrification, which we believe can yield more positive results.

Isabela Klemes, Head of Investor Relations

Thank you, Fabrizio. We have received another question from the chat, asking about our controlling shareholders' political considerations in divesting from certain countries. Fabrizio, could you provide insights into Chile's current investment climate?

Fabrizio Barderi, CEO

Regarding our plans for divestment, the inclusion of Enel Chile among Tier 1 countries confirms our commitment to fostering value creation through integrated operations. Currently, we are focused on sustainable value growth and not planning any major divestments or disposals.

Isabela Klemes, Head of Investor Relations

Thank you, Fabrizio. We also have a question about the gas agreement with Shell. What are our expectations regarding LNG shipments this year and the pricing compared to last year?

Fabrizio Barderi, CEO

Regarding our contract with Shell, while the agreement was partially reduced from 18 to 16 cargoes, and we expect to receive 12 cargoes to Chile this year. The prices are linked to the market, which has now dropped. This allows us to benefit during 2023 compared to earlier prices. We have also contracted additional gas from Argentina to enhance our supply and opportunities. The margin for LNG cargo sales in 2022 was significant, approximately up to $40 million for each cargo we sold, which is an exceptional figure due to the market situation. This was due to large sales plus activities optimizing our gas portfolio.

Isabela Klemes, Head of Investor Relations

I will conclude our results conference call. Our Investor Relations team will be available for any questions you may have. Thank you for your attention. See you soon.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.